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Oil Gloom: Facts Get in the Way, By Mike Larson, 6/24/15, [Money
and Markets]
I’ve heard a lot of doom and gloom about energy on CNBC
and in other mainstream press. Supplies are out of control. Demand stinks.
We’re going to have a glut for the next 100 years, so sell everything.
It’d all be great advice … if only those pesky facts
didn’t keep getting in the way. Facts like this: Crude oil inventories are
tanking. Yes, tanking!
The Energy Information Administration (EIA) just reported
this morning that U.S. crude oil inventories dropped 4.9 million barrels in
the most recent week. That was more than double the average forecast of
analysts.
U.S. crude oil inventories dropped 4.9 million barrels in
the most recent week, more than double the average forecast of analysts.
It was also the eighth straight weekly drop. Do you know
how far back you have to go to find eight consecutive inventory declines?
I’ll tell you: The end of 2007, roughly seven-and-a-half years ago.
What about the Cushing oil depot in Oklahoma, the one the
media was saying would literally overflow a few months ago? Supplies there
plunged another 1.9 million barrels.
While I’m at it, I’d also point out the U.S. oil drilling
rig count just dropped for the 28th consecutive week. That’s the longest
streak in U.S. history, and it leaves rig activity down a whopping 61% from
its October peak.
Call me crazy if you want. But when I see the biggest
decline in drilling activity ever … the longest streak of inventory declines
since before the Great Recession … and increases in energy demand forecasts
from respected sources, I see plenty of reasons for optimism. Optimism that
the supply-demand imbalance that beat energy shares down in the first place
is well on its way to being fixed.
“I’m optimistic that the supply-demand imbalance is well
on its way to being fixed.”
Or to cut to the chase: Forget the out-of-date,
backward-looking talk in the mainstream press, and start digging for bargains
in the oil patch.
Thoughts on the latest inventory data? The outlook for
demand? The seemingly never-ending pessimism on this sector, despite concrete
evidence of a turn starting to get underway? I want to hear from you – and
the Money and Markets website is the best place for you to weigh in.
Our Readers Speak
Greece temporarily moved off the electronic “front page”
yesterday, in light of the release of fresh housing data. I pointed out that
the spring selling season went fairly well, as I expected, and many of you
weighed in with your own thoughts.
Reader Jean had a fairly optimistic outlook, at least as
long as financing costs stay reasonable. The comments: “As long as interest
rates are kept low, there will be decent to good activity, as first-home
buyers move on up and those just entering the market can have a chance to
buy.
“Also, investors will continue to buy and rehab and
resell, keeping the cycle going and improving the landscape. No one wants to
rent when they can afford to buy and that is best for everyone, especially
young families.”
Reader Glenn tempered the enthusiasm somewhat by noting
that home construction still remains well below normal levels even now. His
take: “I spent 30 years in the wood products business from 1969 to 1999 and
really good years were 2-million-plus new starts. So-so years were 1.4
million to 1.5 million.
“Our population has obviously increased a lot in the
intervening years, the inventory of homes is much older, and when you are
talking about 522,000 new starts … well, that really does speak to the economy
and demand/ability to purchase big ticket items. We have a long way to go.”
Reader Charley offered a regional perspective from out
West, saying: “Denver, Colorado has seen housing shortages for remodels or
fix and flip. Some remodeling contractors are going to building new houses
because of it. Often prices are being upped at the table to purchase. Good
for sellers.
“I wonder if this is the last hurrah ’til it turns south
for at least a breather. Many of those fix and flippers actually kept the
homes for rentals. So if the market turns south, it may accelerate south big
time as those investors panic.”
Finally, Reader Mike S. zeroed in on interest rates as the
thing that could upset the apple cart again. His observations: “The cycle of
boom and now coming bust is when mortgage rates hit 5.5 percent. No one in
their right mind should buy now. People who buy now at these elevated prices
because of low interest rates will not be able to sell their house without
taking a hit.
“Do the math: A 450k mortgage, 4 percent, 30-year mortgage
… versus a 5.5 percent payment. A large portion of buyers will not be able to
qualify at those elevated levels. So prices will come down.”
Thanks for all the well-reasoned comments. As the
interest-rate and real-estate specialist at Weiss, I agree that financing
costs are a major issue down the pike.
If employment and wage growth rises at the same time as
interest rates, the market could continue to hold up fairly well. But we
haven’t seen the kind of strong, 1990s-style wage expansion we need for
years. So that may be too much wishful thinking coming from the real estate
industry.
Other Developments of the Day
The massive hacking attack that targeted federal
government employees recently could be followed by others. Why? Because the
government’s “Einstein” security system has problems ranging from delays in
implementation to vulnerability to new threats that don’t at least have
signatures of past attacks.
Think you’re starved for income in this low-rate world?
Well, pension funds and life insurers are in even worse shape – because
they’ve made long-term promises based on the assumption much higher rates of
return would be available from lower-risk bonds. The Organisation for
Economic Co-operation (OECD) is now warning many face solvency threats
because they can’t earn anywhere near enough to cover the promises they made
to beneficiaries. Just another reason why the Federal Reserve should’ve moved
rates off zero a long time ago! Until next time, Mike Larson
Source:www.moneyandmarkets.com.
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You can also access this issue on our website.Oil Doom and
Gloom: Facts Get in the Way, If you didn’t add your thoughts yet, I encourage
you to do so.
Market Roundup Dow-178 to 17,966.07S&P-15.62 to
2,108.58NASDAQ-37.68 to 5,122.4110-YR Yield-.038 to 2.371%Gold-$2.70 to
$1,173.90Oil-$0.75 to $60.26
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