"The oil price on Friday in the New York trading session was routed again (now down 20 Dollars a barrel in 2 months), another ten percent drop in prices, today there is little respite, with another 2 percent plus fall. Oil majors were kiboshed, the energy sector as a collective fell 6.7 percent in half a days trade. I guess in the end, consumers had something to be thankful for, cheaper energy prices."
To market, to market to buy a fat pig. Friday was a horrible no good day if your main core investments were resources stocks alone, I am afraid that the wind on commodity prices has definitely turned. If you are not involved and you are merely a consumer, this is fabulous news. It is of course a zero sum (insert word that sounds like same), in which whatever is gained on the one side is lost by the other. Higher energy prices and commodity prices promote efficiencies. Many of which have been built in over the last decade, we are constantly advancing technologies. The minimum efficiencies for motor vehicles should increase (in the passenger vehicle segment) by nearly 50 percent over the next 11 years. Those were the standards set out by the Obama administration. Ironically there is something called a rebound effect, which means that the cheaper the fuel gets, the more people drive. It certainly makes sense, the cheaper something is, the more you will use it.
The more there is of something, the cheaper it will get too. That has most certainly been the case for oil, the US shale revolution has taken everyone off guard, some of the major oil producers must be seething, there are many countries that are completely reliant on the exports of oil to boost their treasuries. At the same time there are many countries that suffer from having to import a lot of energy, the cheaper the energy requirements, the more that local consumers have to put in their pockets. The narrower the trade deficit (if one occurs) becomes, the better for the health of the importer. The exact opposite is true for the exporters, although you could argue that their consumers benefit a little, the weakening currency does little for them.
The oil price on Friday in the New York trading session was routed again (now down 20 Dollars a barrel in 2 months), another ten percent drop in prices, today there is little respite, with another 2 percent plus fall. Oil majors were kiboshed, the energy sector as a collective fell 6.7 percent in half a days trade. I guess in the end, consumers had something to be thankful for, cheaper energy prices. The oil price, NYMEX WTI Crude oil that is, the front month contract is down 38 Dollars a barrel (from 102 Dollars) to 64 Dollars currently, December 1. The oil price more astonishingly has lost 13 Dollars a barrel in 10 days. Wow. We were not left unscathed here, Sasol fell 8 percent (and a bit), BHP Billiton fell 5.7 percent, collectively resources were down over 5 percent.
Resources were not alone, MTN, with their large exposure to Nigeria (an oil producing nation) saw their share price cut hard, down nearly 3.4 percent. MTN have suggested that they would use this as an opportunity to spend more money on the infrastructure, in other words bring money into the oil rich nation. Remembering that MTN also operate in Iran, this is not easy for that countries finances either. There must be some national treasuries under immense pressure. To leave this piece on oil prices falling heavily, this was an interesting piece about US corporates having crushed inefficient government producers - > As oil prices fall, companies produce more for less. Interesting. Venezuela and so are going to have to pull their socks up and try something different.
It is not just the oil price falling, the gold price is also going to test the lows from early November, expect unfortunately another leg down. More connected to gold prices falling was the non/nein/no vote in Switzerland, which asked the people to decide whether or not they wanted the SNB to buy more gold or not, or keep it at a certain level, the percentage of gold. Without wanting to complicate it too much, in the referendum the Swiss nationals who cast their vote had 23 percent say yes and the rest say no. Gold as a store of wealth, it seems a little like a history lesson to me. Gold prices lower are not good for us as a country, the retail sector having grown rapidly over the years mean more money in the back pockets of cash strapped investors which is a good thing.
Things we are reading and we think you should be too
An interesting hypothesis on the skewed incentives created by slavery - We could have had the steam engine thousands of years ago, but slavery was the reason for the historical delay.
Having the ability to propose a balanced budget is a good thing, considering that growth is slow in the EU and Germany is seen as the engine, less German spending in the short term will probably hurt a bit - Germany gets first balance budget since 1969
Some negative news to take note of out of China - The Chinese Economy Is Facing A $6.8 Trillion Nightmare That Could Get Worse. The way I see it these Ghost cities in China will be filled up soon enough given the rapid expansion of their economy.
Some more news out of China - The World's Biggest Tobacco Market Is Considering Tougher Smoking Regulations. It is an interesting dynamic where the state owned companies are opposing the new regulations, which are imposed by the state.
This is a big milestone in the fight against AIDs - 'Milestone' in fight against Aids as treatment outpaces infections. AIDs costs the world economy billions each year due to the cost of the drugs but also from the impact on production due to the impact on the labour force, having AIDs under control means that more resources can flow into other areas of the economy.
Given the huge drop in the Sasol price on Friday and today, here is a look at where the breakeven point is for oil operations around the globe - Here Are The Breakeven Oil Prices For Every Drilling Project In The World. From what I have read it looks like oil will probably stay around these levels for a while and then slowly tick up towards the $80 a barrel mark. No-one actually knows though.
Innovation hurts jobs in some sectors and creates jobs in others - What does the second machine age mean for our jobs? We have shared a similar article before, this one is more concise and to the point.
Home again, home again, jiggety-jog. Phew, it is going to be exceptionally tough for the commodity producers today. All those folks calling them cheap are going to see their prices a whole lot cheaper now! Obviously the expectations of lower inflation is good for us and the developing world, I am guessing that in Europe the prospects of deflation are starting to loom larger. Expect some action and stimulus from the Europeans, the Chinese with very average numbers this morning (HSBC PMI barely above growth territory) have seen a broader commodities complex slide. Thank goodness for Indian manufacturing PMI. What? That is still the elephant in the room as far as commodities consumption is concerned. Expect a downer today, notwithstanding the fact that the Rand has weakened to lend a hand. Chinese officials are systematically cleaning Hong Kong up, their patience has worn thin.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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