December 11, 2014
The Oil-Drenched Black Swan Event: Oil Prices To Stay At Depressed Levels For Another 5yrs?
Patti Domm, writing on the December 11, 2014 website, CNBC Market Insider, quotes legendary Wall Street investor, Laszlo Birinyi as saying “the oil price drop is what the markets have been waiting for;” and, the magnitude and swiftness of the drop — constitute “a Black Swan event. “What we’ve seen is something people have been talking about for two, three, five years; and, no one is talking about it now,” said Mr. Birinyi, Founder of Birinyi Associates. “It’s just a Black Swan. A totally unpredictable event. It comes clearly out of the blue. Four standard deviations from anything else. In a case like that, there are no perimeters. How can you say it will go to $65, or anything else? My attitude is, it’s a Black Swan [event], the Hurricane Sandy of the market; where you do not know where it’s going — but if you want to guess — go ahead. But, appreciate you are guessing,” Mr. Birinyi said.
“It’s not a flock of Black Swans that Birinyi foresees, as he expects stocks to digest the oil decline, and move higher. He has a 2,100 target on the S and P 500 index, by year’s end.
“Oil is down 43 percent off its June 2014 high, while the S and P 500 is down just 3.2 percent in the same [time] frame,” Ms. Domm wrote. West Texas Intermediate Crude January 2015 Futures plunged 4.5 percent on Wednesday, to $60.94 per barrel.” “Since oil began falling,” Ms. Domm adds, “the S and P Energy Sector has lost 24.3 percent, while the next worst market sector, telecom, — was down just 6.2 percent.
A Note Of Concern On The Smaller Producers; U.S. Shale Output
On October 29, 2014, Russell Gold and Erin Ailworth, writing in The Wall Street Journal, wrote that “oil prices would have to drop another $20 a barrel to choke off the U.S. energy boom, industry experts say, though some smaller American producers would face serious problems from a more modest decline.” When this article was written, oil was selling for $82.20 per barrel. West Texas crude is but $61.11 as I write this article; while Brent Sweet Crude — the most desirable, is selling at $64.76 — both at or near the total the Wall Street Journal said the price would need to be to “choke off the U.S. energy boom.”
Mr. Gold and Ms Ailworth wrote at the time that — “small and midsize companies — not global giants — are behind the surge in U.S. oil output, which hit 8.97M barrels per day,” this past October, according to federal statistics. More worrisome, the authors note, “some of these drillers have taken on a lot of debt, which was easier to justify when oil was going for as much as $107 per barrel,” earlier this spring.
These much lower prices “mean drillers will have less cash to cover their borrowings,” at these low levels. Marianne Kah, Chief Economist at Conoco Philips, said “oil prices would need to fall to $50 per barrel, if you wanted to completely halt production,” in the U.S. shale sector. Ms. Kah added that, 80 percent of the American sector — which Conoco Philips is a major operator — is profitable at prices between $40 – $80 a barrel for benchmark West Texas Intermediate Crude.”
$60 Oil Will Be The Norm For Next Five Years — Economist
Tom DiChristopher, writing in today’s (Dec. 11, 2014) Economist, quotes Andy Xie, former Morgan Stanley and IMF Senior Economist — in an interview with CNBC’s Squawk Box this morning — as saying that “oil prices will stay around $60 per barrel for the next five years, as China’s economy cools down. China is now transitioning from a 15yr. super cycle that built up a massive industrial machine; and, the [China’s] economy must cool down to digest overinvestment — which will drag down commodity prices,” Mr. Xie said. “When China goes into a normal situation, I think the oil situation become normal too, so — $60 would be the normal price for the next five years,” he said.
Of note, Mr. Xie “predicted the oil price plunge to $60 in September, as China’s energy demand tapered off. Mr. Xie said oil price declines are trailing the slide in coal; but, he expects the gap to narrow,’ CNBC noted. “Coal is down 60 percent, so eventually I expect oil to come down to 60 percent too,” he said, — which would be another 17 percent from today’s levels and put the price near the $50 mark.
Geopolitical analyst, Richard Mallinson, from Energy Aspects, disagreed with Xie’s forecast — saying the longer the low-price period persists, the more likely demand will grow.” “Chin isn’t going to be the main center of demand growth anymore. It’s economy is rebalancing; and the growth rate is slowing, but there are other Asian economics, there are other parts of the world, and lower prices will unlock that demand growth. It will just take bit of time to emerge,” Mallinson told CNBC’s Squawk Box. Mr. Mallinson added that “oil prices won’t be able to balance at $60, because many non-OPEC supplies won’t be viable at that level. Consequently,” he said, “producers will bring fewer products online; and, less supply will enter the stream — offsetting the decline in prices.”
I suspect the truth lies somewhere between these two opinions. And, also worry that oil’s Black Swan may lead to other Black Swan events in 2015. Russia, Venezuela, and many Middle Eastern countries depend on petro-dollars to fuel their economies and tamp down social unrest. As the old saying goes, too much of a good thing — can be a bad thing. Will we see more social unrest and instability in Venezuela, Russia, and elsewhere, if oil prices remain depressed down near the $60 mark? What will the impact be on the U.S. economy and elsewhere.
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