Eleven Things You Should Know About The Crude Oil Drop by Attain Capital
Christmas came a month early for those short Crude Oil over the past couple of months, specifically last week, and even more specifically – Friday. Since July, WTI crude has dropped more than 30%, with 10% of that coming the day after Thanksgiving. And just about everyone and their mom (mom’s who have a blog about commodities?) have written something about the Crude Oil move. Here’s 11 insights into what might make this drop more than just this week’s headline.
- Crude Oil’s been dropping since July
While it’s in the news recently – this is nothing new for those who watch commodity markets day in and day out… Here’s a look at January 2015 Crude (WTI) over the past 6 months:
(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart
And Here’s Brent over the same time span:
(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart
PS – here’s more on the difference between Brent and WTI Oil prices.
- Why? There’s LOTS of Supply:
How much Oil are we talking? The Wall Street Journal quotes the Energy Information Administration as saying the US is pumping out 9 million barrels a day, which is up from 7 million last year, and 5 million back in 2008. This is a classic example of how commodity markets work in reacting to supply and demand, not earnings reports, CEOs resigning, and so on. As we talked about a little over a month ago, fracking is booming in the U.S., which is leading to more supply while there is supposedly less demand. According to the Washington Post, Citibank analysts wrote in a report Thursday that global supplies now exceed demand by about 700,000 barrels a day.
But the 10% single day “free-fall” last week is actually being attributed to OPEC deciding to maintain oil production, via Vox.
“But on Friday, prices went into serious free-fall. The reason? OPEC — a cartel of oil producers that includes Saudi Arabia, Iran, Iraq, and Venezuela — had a big meeting in Vienna on November 27. Before the gathering, there was speculation that OPEC countries might cut back on their own oil production in order to prop up prices. But in the end, the cartel couldn’t agree on how to respond and did nothing [keeping production at about 30 million barrels a day].”
- And a bit of what Reuters is calling “A Price War.”
OPEC could be playing a massive game of Chicken with the Oil Sands folks here in North America, deliberately keeping up production to drive prices so low, that it becomes unfeasible for fracking companies to make a profit. If this plan shakes the N. America producers, this could lead to a major fall off in fracking, and even the demise of fracking in the coming years. However, if the U.S. calls OPEC’s bluff and keeps production up despite plummeting prices, Some of the OPEC countries could also be in trouble financially. Who will flinch (or go bankrupt) first.
“OPEC is always fighting with the United States because the United States has declared it is always against OPEC… Shale oil is a disaster as a method of production, the fracking. But also it is too expensive. And there we are going to see what will happen with production,” says Venezuelan Foreign Minister Rafael Ramirez. {part of OPEC}.
“This is a risky stand-off for OPEC, as many of its member countries require high oil prices to balance their budgets. Iran, for one, is facing a real pinch. It’s also a sign that OPEC’s influence over global oil markets may be waning.”
It’s a classic risk and reward play. Although there are international ramifications; which could have rippling effects on U.S. fracking companies, and global economic free fall.
- Energy Companies are about 10% of the S&P 500, and 25% of Capex
Upon closer inspection – the stock market is somewhat infested with commodity based companies: the Exxon Mobil Corporation (NYSE:XOM), Alcoa Inc (NYSE:AA), Archer Daniels Midland Company (NYSE:ADM), Monsanto Company (NYSE:MON) of the world, and slew of other companies dependent on the farming, mining, drilling, and shipping of commodities (Caterpillar Inc. (NYSE:CAT), Deere & Company (NYSE:DE), CSX Corporation (NYSE:CSX), etc). This blurring of lines between commodities and commodity companies tends to cause some higher than normal correlation between commodities and traditional investments. What’s more, energy companies spend above their pay grade, so to speak, with 25% of the S&P 500’s CAPEX and R&D coming from energy companies according to Business Insider:
Charts Courtesy: Business Insider
- Low Crude = No Junk Bond Demand = Lower Stock Market?
By way of the Reformed Broker, comes the thesis from James Farro of Signalinea, that the slide in crude will do damage in the high yield market, setting off a chain reaction of de-risking, default and outflows in high yield which will cause its own chain reaction.
Chart Courtesy: The Reformed Broker
- Russia doesn’t like Low Crude Oil
The Russian Ruble is collapsing. It dropped 8% vs. the Dollar. Its biggest 1-day drop since 1998.
The Russian Ruble is collapsing. It dropped 8% vs. the Dollar. Its biggest 1-day drop since 1998: http://t.co/lR1Dsz6GCa $USDRUB $RSX
— StockTwits (@StockTwits) December 1, 2014
While Russia is not part of OPEC, oil revenues make up a big part of Russia’s budget, via VOX.
“But the plunge in global oil prices is likely to put even further strain on the nation’s economy. Oil revenues account for roughly 45 percent of Russia’s budget, and the government’s spending plans for 2015 had assumed that prices would stay in the $100-per-barrel range. If oil continues to stay well below that, Russia will either have to draw down its $74 billion foreign-exchange reserves or cut back on planned spending.”
- Oil is Just one of several Commodities Selling off in 2014
Maybe one of the most ignored aspects of this sell off is that, this downtrend isn’t just happening in Crude oil, or even the energies; it’s happening in Commodities. Cotton is also down 30% on the year, so is Soybeans; and the long only Commodities $DBC is down 20% {past performance is not necessarily indicative of future results.}
(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz
- You were just handed a $1,000 and you didn’t even notice
One of the most obvious effects is saving money at the pump. Back in November, the Washington Post pointed out that crude’s fall off was already saving the average American quite a bit of money.
“The average American spends about $2,600 yearly on gasoline, according to Barclays — about what is spent on restaurants, and twice what is spent on phones and phone bills. The 20 percent slide in gas prices since June has already saved the average person $520.”
Imagine what that number is like now? $1,000?
- Friday’s drop was nothing, compared to 1991.
There’s been an explosion of content over this move, and with good reason, because of a single day double digit loss. But our good friend Peter Brandt reminds us that this drop is nothing compared to the drop during the Iraq War Bombing in 1991, when prices fell -21% “overnight”.
10. Managed Futures are generally loving it
Many Managed Futures Strategies we track are short energies, specifically, Crude Oil, including Attain’s Trend Following Fund. But this move is good for other managed futures strategies as well, including discretionary traders. If Crude does drop to $40, like Bloomberg suggests, this could be a trade of decade for some strategies. On the flipside, OPEC could change their minds, or fracking could come to a halt, and Oil could spike back at any moment. We’ll just root for the trend as long as it lasts.
11. Seventeen more links for your Crude Fix
- 900% Increase in Oil Production, Gas Below $3, and Oil to Zero?
- A Global Macro take on Crude
- Mama Said Knock you out
- Get Ready to be Long Crude Oil
- The Incredibly Boring Crude Oil Market
- Energy Markets vs. Energy Companies
- 4 Charts that have Everything and Nothing to do with Crude Oil Speculation
- A Coup, Exploding Train, and Hurricane Walk into a Bar…
- WTI vs. Brent Spot Price
- What about Peak Oil Demand?
- Bucking Vacuum Mentality
- When Gas Goes Wild
- Anatomy of a Trend Following Breakout – Crude Oil
- Crude Trends and Cursing your Manager
- Anatomy of a Trend Following Trade – the Short Side
- Anatomy of a Trend Following Trade – the Short Exit
- Anatomy of a Trend Following Trade – the Journey
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