Given the small joy yesterday and the bloodshed in the markets today -- WTF is up with the entire market moving in lockstep with the price of oil?
-
Want to remove ads? Register an account and login to see fewer ads, and become a Supporting Member to remove almost all ads.
Finance types: Oil price & broader market
- Thread starter Bangor Bob
- Start date
-
- Tags
- Off Topic
nwdiver
Well-Known Member
I was thinking the same thing... but I suspect the market may actually be reacting more to the economic situation in China than the price of oil...
Here's my understanding of why everything is following oil. There is a glut of oil, and most of the excess production is coming from the US/Canada via Tar Sands/Fracking. These are expensive oil sources. So when oil was over 100 a barrel, there was much borrowing to get these expensive oil out (and much profits). Now that oil is super cheap, a lot of the companies that borrowed (US/Canada) are hurting and potentially, if not already, going bust. When they go bust, so goes their loans, so go the banks. That is bad.
China factors into things because when their economy was mandated to be export driven they would suck up commodities, and oil. Now with the government trying to change the economy there, the rate of growth is falling and China's demand for commodities has significantly dropped. Also much of the developing world has hit a significant economic downturn, and they were also some of the bright spots in ICE car purchases and oil demand (think Indonesia). Thus oil is kind of a proxy for overall world growth and as such, if there is a glut, it portends a global slowdown (traditional view).
Now I am not a financial expert or Wall Street guru. So please feel free to tell me I am full of it.
China factors into things because when their economy was mandated to be export driven they would suck up commodities, and oil. Now with the government trying to change the economy there, the rate of growth is falling and China's demand for commodities has significantly dropped. Also much of the developing world has hit a significant economic downturn, and they were also some of the bright spots in ICE car purchases and oil demand (think Indonesia). Thus oil is kind of a proxy for overall world growth and as such, if there is a glut, it portends a global slowdown (traditional view).
Now I am not a financial expert or Wall Street guru. So please feel free to tell me I am full of it.
strider
Active Member
The drop in the price of oil is nearly completely explained by the rise of the dollar. If you place a chart of oil over the dollar (not the DXY, too heavily Euro weighted - use the Fed one) they are mirror images.
On the other hand, as GTG said above, commodities in general are proxies for economic output and the global economy is slowing (I believe we're already in a recession). Countries like Saudi Arabia have no choice but to keep pumping as they need the cash to keep their societies from revolting. Venezuela was/is the same. The only way Chavez stayed in power was by using oil money to "bribe" the citizens. Many petro-states operate this way.
Finally, the Fed has recently ended a 30-year cycle of decreasing interest rates. That means companies and governments could continue to borrow more and more while making the same monthly payment. This has caused all manny of financial shenanigans (share buybacks and such). This has now come to an end. Most traders have never seen a rising interest rate environment. I think the media is blaming the downturn on oil when oil is a symptom.
On the other hand, as GTG said above, commodities in general are proxies for economic output and the global economy is slowing (I believe we're already in a recession). Countries like Saudi Arabia have no choice but to keep pumping as they need the cash to keep their societies from revolting. Venezuela was/is the same. The only way Chavez stayed in power was by using oil money to "bribe" the citizens. Many petro-states operate this way.
Finally, the Fed has recently ended a 30-year cycle of decreasing interest rates. That means companies and governments could continue to borrow more and more while making the same monthly payment. This has caused all manny of financial shenanigans (share buybacks and such). This has now come to an end. Most traders have never seen a rising interest rate environment. I think the media is blaming the downturn on oil when oil is a symptom.
the short answer is for now yes, the stock market is taking it's cues from the oil markets. IMHO the correlation is shallow but "professional" analysts aren't always very clever and will grasp at anything to give them talking points. that said a huge part of the economy is going to take a beating from low oil prices but that should be more than balanced out by other segments of the economy that will benefit from the lower costs of energy.
many many years ago when I was a metals trader there was a belief that the prices in the grain markets were correlated to the price of precious metals and for a year or so when the grains went up or down the metals traded in lock step. sometimes mere mortals like us cannot explain what fuels market moves, but to buck those trends is foolish at best.
Thanks for the input. I suppose another item is that there is a lot of automated trading happening, and if a few quants out there have programs doing a lot of trading based on the price of oil, then that could contribute to the irrationality of the past couple weeks.
I'll be so happy when the price of oil is as important to the market as the price of granite - ie, not at all... Roll on, electrification of transport!
I'll be so happy when the price of oil is as important to the market as the price of granite - ie, not at all... Roll on, electrification of transport!
dc_h
Active Member
Oil is the most visible driver of the market and is a symptom of slower growth, and a cause of financial risk. Oil is down not due to the dollar, but due to demand not growing to meet increasing supplies. The dollar strength right now is more a function of relative economic strength, which encourages foreign investment and savings in the US, and buoys interest rates, relative to negative rate Europe. Oil's decline could drive down the dollar next year as Saudi Arabia and other oil producers cash out more dollar denominated savings to fund national social policies.
The supply issue is driven by US, which has increased oil production almost 5 million barrels a day and Saudi Arabia is producing almost 3 mm barrels above their baseline from 2009. Iraq has increased production to prewar levels and Russia is producing flat out. Capital pullback is slowly reducing production, but producers have debts or national social expenditures to meet and keep producing at full capacity to pay the bills. The gradual pullback in production is also being countered by increased fuel standards in the US and China, which are the two largest consumers with about 20% of the global market. As China deals with their pollution, coal and oil will be targeted for a declining share of total energy production, putting a long term cap on prices for oil globally. The coal decline is mostly hurting Australia and some sectors in the US. Oil's decline is causing a downturn in Canada, which could have a secondary impact on their housing market and wealth affect spending reductions. Oil is also contributing to recessions in Russia, Venezuela, Saudi Arabia and other countries that depend on them for trade or support, which has impacts on exports from Europe, the US and other major manufacturers.
The major systemic risk in the US, Europe are more financial, as we wait to see which oil producers go bankrupt. Many producers were not cash flow positive at $40 a barrel, and won't be able to cover interest payments at this level. Venezuela seems to be the only country in default territory, but Saudi Arabia and other middle east countries will have to make hard decisions about social support policies in 2016, or risk depleting national savings that were built up over decades, in the next 2-3 years. Ironically, social unrest and potential impact to production is potentially the nearest term driver to increase prices, barring conflict between Iran and Saudi Arabia.
Those are my thoughts on the current drivers anyhow. Not sure what can change the decline in oil at this point, but any trend that can't continue; won't. Producers will need to agree to cuts, or storage and ships won't have room for more capacity. That would cause a final fall and drive capitulation of the high priced least capitalized producers.
How all of this impacts Tesla and TSLA is yet to be seen. Elon's commitment to making a better car, rather than a different car is what has made the difference to date. I think it will make Tesla the Apple of the auto industry, with best in class margins, but it is going to take the next 2-3 years to really prove as the Model 3 competes in a more price conscious segment.
The supply issue is driven by US, which has increased oil production almost 5 million barrels a day and Saudi Arabia is producing almost 3 mm barrels above their baseline from 2009. Iraq has increased production to prewar levels and Russia is producing flat out. Capital pullback is slowly reducing production, but producers have debts or national social expenditures to meet and keep producing at full capacity to pay the bills. The gradual pullback in production is also being countered by increased fuel standards in the US and China, which are the two largest consumers with about 20% of the global market. As China deals with their pollution, coal and oil will be targeted for a declining share of total energy production, putting a long term cap on prices for oil globally. The coal decline is mostly hurting Australia and some sectors in the US. Oil's decline is causing a downturn in Canada, which could have a secondary impact on their housing market and wealth affect spending reductions. Oil is also contributing to recessions in Russia, Venezuela, Saudi Arabia and other countries that depend on them for trade or support, which has impacts on exports from Europe, the US and other major manufacturers.
The major systemic risk in the US, Europe are more financial, as we wait to see which oil producers go bankrupt. Many producers were not cash flow positive at $40 a barrel, and won't be able to cover interest payments at this level. Venezuela seems to be the only country in default territory, but Saudi Arabia and other middle east countries will have to make hard decisions about social support policies in 2016, or risk depleting national savings that were built up over decades, in the next 2-3 years. Ironically, social unrest and potential impact to production is potentially the nearest term driver to increase prices, barring conflict between Iran and Saudi Arabia.
Those are my thoughts on the current drivers anyhow. Not sure what can change the decline in oil at this point, but any trend that can't continue; won't. Producers will need to agree to cuts, or storage and ships won't have room for more capacity. That would cause a final fall and drive capitulation of the high priced least capitalized producers.
How all of this impacts Tesla and TSLA is yet to be seen. Elon's commitment to making a better car, rather than a different car is what has made the difference to date. I think it will make Tesla the Apple of the auto industry, with best in class margins, but it is going to take the next 2-3 years to really prove as the Model 3 competes in a more price conscious segment.
My point is that at the time of capital allocation, ie when the investment is being made, the investment is expected to generate enough cashflow to return the initial investment to the investor, whether that be a debt investor or an equity investor.
Offcourse if you are using debt to buy assets, the life of the debt should match the life of the assets or be very long term debt if assets are long term.
Debt in the form of bonds etc can be a permanent part of a companies capital make up, it's just another level of investment really, equity investment suits some people, bond investment suits others, there is no problem with a company taking on some bond holders as part of their capital structure, yes bonds all expire at some point in time, but you can migrate risk by spreading out maturities, and having multiple options for handling the maturity.
Anyone, I am not trying to have a conversation about debt vs equity, just pointing out that when allocating capital the point of making an investment is that the asset should generate enough cashflow to pay back both debt and equity holders, and the debt holders have the equity holders capital as a buffers, if the assets can't earn enough to pay back the equity and debt, well you made a bad investment.
Offcourse if you are using debt to buy assets, the life of the debt should match the life of the assets or be very long term debt if assets are long term.
Debt in the form of bonds etc can be a permanent part of a companies capital make up, it's just another level of investment really, equity investment suits some people, bond investment suits others, there is no problem with a company taking on some bond holders as part of their capital structure, yes bonds all expire at some point in time, but you can migrate risk by spreading out maturities, and having multiple options for handling the maturity.
Anyone, I am not trying to have a conversation about debt vs equity, just pointing out that when allocating capital the point of making an investment is that the asset should generate enough cashflow to pay back both debt and equity holders, and the debt holders have the equity holders capital as a buffers, if the assets can't earn enough to pay back the equity and debt, well you made a bad investment.
Similar threads
