articles : financial sense march 27, 2019 are you …are you paying attention to oil? march 26, 2019...
TRANSCRIPT
eResearch Corporation 100 University Avenue, 5th Floor Toronto, Ontario M5J 1V6
www.eresearch.com
Articles: Financial Sense March 27, 2019
Are You Paying Attention To Oil?
DISCLOSURE: The contents of this report were researched, analyzed, and written for
Financial Sense, and were put into this report format, and published and distributed by eResearch Corporation. eResearch Corporation is pleased to provide an article by Financial Sense. .
The article is entitled, Are You Paying Attention To Oil?)
TODAY’S ARTICLE: “We Have Never Seen Anything Like This”
The article is presented on the next page, and it also can be accessed at the following link: Today's Article You can learn about Financial Sense at its website: http://www.financialsense.com
___________________________________________________________
eResearch was established in 2000 as Canada's first equity issuer-sponsored research organization. As a primary source for professional investment research, our Subscribers (subscription is free!!!) benefit by having written research on a variety of small- and mid-cap, under-covered companies. We also provide unsponsored research reports on middle and larger-sized companies, using a combination of fundamental and technical analysis. We
complement our corporate research coverage with a diversified selection of informative, insightful, and thought-provoking research publications from a wide variety of investment professionals. We provide our professional investment research and analysis directly to our extensive subscriber network of discerning investors, and electronically through our website: www.eResearch.ca. Bob Weir, CFA Contributing Analyst
Note: All of the comments, views, opinions, suggestions, recommendations, etc., contained in this Article, and which
is distributed by eResearch Corporation, are strictly those of the Author and do not necessarily reflect those of
eResearch Corporation.
eResearch Corporation - 2 - www.eresearch.com
Are You Paying Attention to Oil?
March 26, 2019
We Have Never Seen Anything Like This
By Justine Hall
Digital Content Assistant, Financial Sense Wealth Management
Last week, the Fed made an unprecedented dovish turn. Nick Reece of Merk Investments joined FS insider to discuss this along with record-loose U.S. financial conditions and the importance of U.S. oil production in terms of inflation and future Fed tightening.
“Financial conditions in the USA are at the loosest levels of the cycle according to the Chicago Fed’s National Financial Conditions Index,” Reece said. “Now that the Fed has communicated its plans on balance sheet normalization and have said they are going to stop quantitative tightening in September... they are really only left with the tool of interest rates.”
Reece added that he believes we are in a cycle that is still going, especially since “financial conditions continue to be extremely loose and extremely favorable,” citing the Chicago Fed National Conditions Index below as one such indicator that shows financial stress levels are quite low. He said his best-case scenario would be that the Fed continues with “another hike or two” in this cycle.
BW: See the chart on the next page. The top line is the Conditions Index and the darker lower line is the S&P 500 Index. The gap has closed. First time since 2008!
eResearch Corporation - 3 - www.eresearch.com
Source: Nick Reece, Merk Investments
According to their dot plot, the Fed is planning to raise rates one more time in 2020 but stay put for the remainder of 2019. The Fed will release an updated dot plot in June and Reece believes “we could get a dot plot…that is all of a sudden looking like we are going to have to do a few more hikes, maybe one or two more.” He said the reason for this could be due to the appreciation we have seen in oil prices since late last year, which will start pushing up inflation. “So, if this trend continues in oil,” Reece said, “the year-over-year comparison is actually going to be adding to headline inflation in the second half of the year.”
“There is a strong relationship between oil prices and inflation expectations, which is relevant to Fed policy,” Reece explained. He sees three main factors that led to the decline in oil prices in 2018. The first is the global slowdown, which is quite apparent when you look at the global PMI downtrend last year and continuing into this year, as can be seen in Reece’s chart below.
BW: The different colour lines on the chart on the next page represent different countries. It becomes a bit of a tangled mess and is difficult to follow.
eResearch Corporation - 4 - www.eresearch.com
Source: Nick Reece, Merk Investments
The second factor Reece identified is speculative positioning. “Futures speculators were extremely levered long in the oil market following the trend and a lot of that had to unwind, which added to the downward pressure to oil prices in the fourth quarter.”
Supply increases are the third factor Reece named. Oil supply increases have, in large part, come from the USA making the oil sector that much more of an important piece in the U.S. economy. This relationship between oil supply and the U.S. economy could be a contributing factor, Reece said, “as to why oil prices have been such a good real-time indicator for manufacturing PMI in America.” Consider the history of U.S. oil production from 1920 to 2019. After hitting a low in the late 2000s at around 4 million barrels per day, it has since skyrocketed to a record 12 million barrels per day!
BW: The chart on the next page is an excellent overview of U.S. oil production over the decades. The sharp increase since 2010 is due to the rapid development of the oil shale fields such as the Permian. Oil shale production increases rapidly upon discovery but, equally, declines rapidly as the field is developed. This means that new discoveries need to be made on a continual basis in order to maintain the same, or increasing, level of output.
eResearch Corporation - 5 - www.eresearch.com
Source: Nick Reece, Merk Investments
The USA has now overtaken Saudi Arabia and Russia as the largest oil producer, completely reversing the 30-40 year downtrend in place since the 1970s. This is extremely significant and perhaps one of the most overlooked factors when it comes to the outlook for inflation, Fed monetary policy, and the business cycle.
What is more important is that this massive spike in oil production has taken place only during this economic cycle, from 2009 to today. We have never seen anything like this during any other cycle in U.S. history.
Log in to listen to Reece's full interview with FS Insider.
Not a subscriber to Financial Sense? Click here for a free trial.
________________________
eResearch Corporation - 6 - www.eresearch.com
ABOUT THE AUTHOR
Justine Hall
Digital Content Assistant at Financial Sense Wealth Management
BW: For information on Financial Sense and how to subscribe to its services, see the
information below.
FINANCIAL SENSE
Financial Sense Advisors, DBA Financial Sense Wealth Management, is a Registered Investment Advisory firm providing services in the areas of Wealth Management, Financial Planning, Retirement Services, Insurance and many others. If you would like to speak with one of our licensed Wealth Managers, please give us a call at (858) 487-3939, or visit our website at https://www.puplava.com
Disclosures: All data has been provided by Bloomberg. This information is for educational purposes only and is not intended to be investment advice. The information provides here does not consider reader’s
suitability or risk tolerance. Be advised that you invest at your own risk. For your particular financial management needs and situation, please consult your financial advisor.
######
<continued>
eResearch Corporation - 7 - www.eresearch.com
Tired of sound bites? Want in-depth financial and economic coverage? Sign up for a FREE TRIAL to our premium podcast by clicking here.
CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .
For more information about Financial Sense® Wealth Management, click here. For a free trial to our FS
Insider podcast, click here.
About FS Staff
Financial Sense: Primary Tel: 858.487.3939
[email protected] https://www.financialsense.com/
CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .
Financial Sense: http://www.financialsense.com