Oil prices collapsed 77% from $147 to $33 in the final 5 months of 2008, reflecting the massive downturn in global consumption now underway. Recently we have seen friction in the Middle East and Russia thrust a bit of a terror premium back into the mix, taking crude back to $50 a barrel this week. But as distracting as the geopolitics may be, the main plot of global recession continues unabated and demand for energy is not likely to pick up over the next year.
Meanwhile as the Wall Street Journal points out today:
“OPEC's quota reduction is unconvincing so far. And each cut increases spare capacity, which has doubled already to three million barrels a day. And as Deutsche Bank analyst Paul Sankey points out, while 1.5 million barrels a day represented a year's worth of demand growth in 2008, three million represents “infinite” spare capacity relative to demand when it is falling, as it looks set to do in 2009.” See Limits to Oil majors' largesse
At the same time, commodity index funds are beginning some rebalancing selling off gold and adding energy to top up their prescribed index weights. This will have some artificial impact on the price of these commodities. See: Beware, commodities index rebalancing ahead.
Energy gains have pushed the TSX up over the past 5 trading days. But given that the main plot of falling energy demand is likely to force its way back to center stage in the months ahead, we have to view this recent market rally with some scepticism. In a healthy bull market expansion oil is not the leading sector.
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Danielle , how do you feel about bond ladders. For the fixed income portion of my portfolio I am looking at a Claymore 1-5yr govt bond ladder ETF. The principle is secure in Gov't of Canada bonds, however the current yield is only 3.5%. In anticipation of higher inflation this yield will grow as bonds mature and new issues are purchased with higher yields. Henk
What about the US planning to fill the SPR again, along with China wanting to add more to their reserves. These are 2 big players starting to buy Oil at cheap prices. This may take off oil that is being stored on ships and bring it back up from current levels.
There is I think a 7% depetion rate a year of world oil production according to the IEA. At this price the 7% wont get replaced, the current spare capacity will simply be capacity at the end of the year after depletion there will be no spare capacity.
Oil may have not been a leading sector in the past, but its finite this maybe the time it leads.
Hi Danielle,
I keep hearing about people speaking of a rally coming in the markets and that is all fine. However i think the rally has already happened. I have a question about corporate bond etf's. Do they follow equities? What do you think about the outlook for corporate bonds over equities? Are they safer or just as risky?
Thank you,
Parm
A very prescient call on oil in view of today's oil inventory report and subsequent decline in the price of oil. I am guessing that down the road it will be a different story as delayed development projects worldwide collide with rising demand, but the road may be long.
Oil was up 50% in a couple of weeks and due for a pullback. Rising inventories in the winter is meaningless in the bigger scheme of things.
Oil extraction flow rates are depleting 7% per year and new projects are getting canceled/delayed.
By this Summer, I predict we'll see $90 oil and in 18 months we'll see $200 oil.
Think big picture and longer term. Don't get caught up in the weekly inventory reports and the out of breath CNBC reporters spewing their excitement.
Henk, for the guaranteed portion of an account I think the govt bond ladder is a good one. I do not see higher rates in the near term, but at the same time I do not think currently depressed long term rates are attractive. So I would keep your ladder 1-5.
Parm, yes there is a correlation between corporate bond and preferred share prices and the equity cycle. As we move closer towards an economic upcycle again, corporate bond and preferred shares look pretty attractive. Many have dropped by half. They may still lose value in the months ahead though while the equity cycle tries to put in “the” bottom. But adding some corporate bonds and prefs(espeically with the diversity of an ETF) makes good sense now that yields are above 6%. Once prices recover you will have capital gains on top of tax efficient income.
With debt to gdp of 400%, the U.S. won't be entering an economic upcycle for at least 10 years.
We're just now entering the downturn. We've yet to see the credit devastation in terms of corporate defaults and bankruptcies that are sure to come.
I predict preferred stock etf's will be decimated.
Hi danielle
You had mentioned cycles before and I believe you had mentioned that we are in a secular upcycle for commodities?
Does that hold true today- do you see the uptrend in commodities continuing? Thanks
yes I see the secular bull in commodities continuing for another 7 to 10 years. However, the cyclical pull-backs will likely continue to be as vicious as we have seen over the past year of contraction. So buyers need sell rules as always.
Buyers need Buy rules more than Sell rules. A disciplined sell stop might prevent a disastrous loss but a loss is still a loss.
Knowing when to buy is the key to making money in the markets.
There have been a series of negative posts lately, all posted by Anonymous. Including. My method gained 60% last year, (yours didn't)Prefs will be a disaster (you think they are a good idea) and knowing when to buy is more important than knowing when to sell.( you think having a sell discipline is important)
Posting negative input anonymously denies us the benefit of knowing if this is a single contrarian or a broader point of view.
I'm beginning to think this is one person. A competitor? I hope it isn't personal.
I, for one, have the greatest respect for Danielle and await her buy signal before I move back into equities. I really don't need or want advice from an anonymous source.
Let's try to keep this blog polite, respectful and helpful to all.
BillB
Hi Danielle,
I just read an article stating that drybulk bessel rates have gone up recently. I am just wondering how important these economic indicators are and do you follow them? Or are they just alot of fluff on tv?
Thanks,
Parm
we watch them for evidence of the larger cycle phase. The bulk rates had fallen to basically zero over the past few months, so they will have to tick up eventually. A gradual increase in these rates over a significant period indicates increasing consumption.