Macro Commentary
OK. We get it. The market does not know what the price of oil should be. After the International Energy Agency (IEA) revised demand down, again, oil prices just dropped. In the IEA report, however, demand was revised down by about 230k barrels per day from a base over 93mm. In addition, almost all of that adjustment was from an anticipated reduction in demand from Russia since they are in a sanction-driven recession (about 195k barrels). That is not a big shift in expectations of anticipated supply versus demand. It leaves one to wonder how much recent price action may be computer-driven – momentum algorithms chasing a strong trend. Earlier this week, Kuwait said that they expect to see oil prices around $65 until middle next year when OPEC meets next. Did OPEC understand what would come out of the box they opened? We are not sure they did. The price by which cartel members can balance their budgets is now above current oil prices for around 10 of the 12 members. There is a serious squeeze for just about everybody other than Saudi Arabia. Already delicate geopolitics may get more so.
Generally speaking, one would think that falling energy prices (for a reason other than economic slowdown) would be generally good for broader equity markets. More cash in the pocket of consumers, less cost for producers, etcetera. But the US equity market just had the worse week it has had in a few years. Is it spillover concern from the Euro-area? Greek troubles are flaring up almost as much as their bond yields. Ten year yields have gone from below 6% in September to above 9% today. Greek equity markets sold off too. We are nowhere near the crisis-stage levels in 2011 but the trend is still troubling. Combine that with the weaker than expected take-up from the European Central Bank’s (ECB’s) targeted lending program from the banks and the ECB has work to do in January if they do not want to see the work done so far unraveled.
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