Oil Prices Are Driving The Market

Oil and commodities got their own Black Friday last week: “the prices of U.S. crude oil fell 10.2%, silver 6.4%, natural gas 6.1% and copper 5.8%.  The Alerian MLP Index — a basket of companies, organized as master limited partnerships, that handle and distribute oil and gas — fell 5.3%.  Gold got off easy, losing a mere 1.8%,” however the same can’t really be said for gold miners.  Furthermore, “now that oil has fallen 38% in five months, you should expect a rash of predictions of apocalyptically low prices.”  Speaking of which: Oil At $40 Possible As Market Transforms Caracas To Iran.  The plunge in oil prices may have had something to do with this: Ali al-Naimi, Saudi Arabia’s oil minister, “told fellow OPEC members (last Thursday) they must combat the U.S. shale oil boom, arguing against cutting crude output in order to depress prices and undermine the profitability of North American producers…Analysts said the decision not to cut output in the face of drastically falling prices was a strategic shift for OPEC…clearly drawing a line in the sand at 30 million bpd.  Time will tell who will be left standing.”  Furthermore, “the repercussions of Opec’s non cut last week have turned to wide-eyed realisation for some market participants that the price function in commodity markets has never really been about the fundamentals as much as the dedication of certain entities to ‘not sell’ volumes when they have them on hand.”


Meanwhile, as “falling costs in everything from gasoline to soybeans has lent credence to the notion that a pickup in consumer spending will lift economic growth, bond investors are counting on the slump in commodities to temper any erosion in the value of fixed-income payments caused by inflation…’Lower commodity prices…are raising deflation risks in the euro zone and will keep inflation in the U.S. stubbornly low.’”  Speaking of deflation risks, as Chinese manufacturers “drop prices to increase sales, the impact is being felt across the world (alt), from the factory floor to the shop shelf.  With policy makers in many economies — Europe and Japan especially — worried about falling prices, China’s own ability to boost inflation is becoming a key part of the puzzle.”


Meanwhile, Mohamed El-Erian says “the overall global effect (of cheap oil and gasoline) will be to boost consumption and lower manufacturing costs in countries that have been struggling to overcome prolonged malaise in growth and jobs.”  Also, “lower oil prices help counter some forces that have worsened the inequality of income, wealth and opportunities.”  However, “there is also the ugly: The possible reaction of certain oil-producing countries that are particularly hard hit by the price declines.  Nowhere could this prove more consequential than in Russia.”  Meanwhile, the Russian rouble is nosediving (alt): “the currency weakened to a record of 53.91 per dollar — a move of almost 9 per cent — before staging a rally (this morning)…some of Russia’s banks [have] started limiting sales of dollars and euros to $10,000 or €10,000 per client…The currencies of oil exporters with floating exchange rates (e.g. Malaysia, Mexico and Colombia) have also fallen.”