Money and Markets: Investing Insights

Oil Plunge: How Low Can It Go?

Mike Larson | Monday, December 7, 2015 at 4:20 pm

Market Roundup Dow 17,730.51 (-117.12) S&P 2,077.07 (-14.62) NASDAQ 5,101.81 (-40.46) 10-YR Yield 2.22% (-0.05) Gold $1,070.00 (-$14.00) Oil $39.35 (-$2.04)

Around this time last year, crude oil looked like it was bottoming out after a long, nasty spill from $104 to $44. The commodity subsequently rallied to around $60, pushing many energy stocks higher in the process. But now the bottom is dropping out from under oil again. Crude tanked to as low as $37.50, undercutting the August panic lows and putting it back at levels we haven’t seen since the depths of the Great Recession.

That, in turn, is pulling the rug out from under energy shares, not to mention putting even more pressure on the junk bond market.
The SPDR Barclays High Yield Bond ETF (JNK) just undercut its October lows, leaving it at the lowest level in four years. Shares of one of the most widely held energy sector yield plays, Kinder Morgan Inc. (KMI), also fell again, off 2.6%. It has lost around $9 in the past couple of weeks, putting it down more than 60% year-to-date.
What happened? A Wall Street Journal headline today makes it clear: “As Oil Keeps Falling, Nobody is Blinking.”

Oil prices have tanked from over $100 a barrel to below $40 today.

The story chronicles how U.S. production is barely falling, despite the plunge in prices. It cites a handful of reasons: Wells originally planned and drilled years ago when prices were much higher are coming online. Hedges have helped postpone the financial day of reckoning for troubled independent producers. And the need to generate even a reduced level of cash flow is keeping more taps open than you would expect.
Then there’s the landmark OPEC decision from the end of last week. The cartel didn’t just refuse to cut its official 30 million barrel-per-day production target. It actually said it would continue to informally produce 1.5 million more barrels per day than that.
The meeting confirmed that Saudi Arabia is still not blinking with its strategy. The plan? Overproduce in order to drive U.S. shale producers into bankruptcy, and keep the world hooked on Middle Eastern oil.

“Saudi Arabia is still not blinking with its strategy to overproduce to drive U.S. shale producers into bankruptcy.”

So how low can oil go? Well, now that we’re taking out the August panic low, the next logical technical level to watch is $33. That’s where oil bottomed out during the 2008-09 Great Recession.
It’s not like oil is alone, either. Virtually every major commodity is under pressure. That includes iron ore, which just dropped below $40 per metric ton for the first time since 2009.
Bottom line: Oil should remain firmly on your radar screen as an investor. If crude drops sharply toward its Great Recession lows, that’s going to put even more pressure on the broader junk bond and equity markets. It also tells me the global economy could be in more trouble than is generally appreciated.
So what do you think about oil’s latest swoon? Can anything arrest the slide? How important is it for the broader bond and stock markets? Are you bottom fishing here, or staying away? Hit up the comment section below and share your thoughts.

Our Readers Speak

I hope you enjoyed your weekend, and I appreciate your taking the time to comment on some of the major market issues out there.
Reader R.J. weighed in on the outlook for Federal Reserve monetary policy, saying: “If the Fed actually has the guts to raise rates, this would be historic, but not for the reason you think. It would be historic because this would be the first time ever the Fed was ahead of a rate cycle.
“They’ve always been too late to raise rates, then overdo it. Remember, Janet Yellen says their targets have not been reached, and now the farce of the low participation rate due to aging population has been debunked. Also since Bernanke, the Fed has been overly political. So I don’t think they will raise rates.”
Reader Ron added: “I have been puzzled by Yellen and Draghi. I couldn’t remember where I had seen this game before when voila! They are found on street corners in every city playing three-card monty and taking the suckers’ money.
“Now, giving them some credit, they don’t hit and run like the street corner hustlers. But they stick around and manipulate things so it appears everyone is a winner. I have been withdrawing from the market for the past three months and will be 50% before the end of the year. Winter is coming.”
On the other hand, Reader Etoleary was more optimistic about the outlook for markets, saying: “I think you put too much emphasis on oil prices and the causes of credit deterioration. There are plenty of independent indicators that suggest other factors are at work and more potent than $40 oil. The big picture doesn’t support the pessimism that’s so widespread.”
Reader Tom picked up on the same message, saying: “While you’ve been urging people to hoard cash, the market sprung back in spectacular fashion.
“My advice is still the same: Go long the stock market, despite the naysayers. Invest in high quality stocks (especially during the dips) and don’t freak out over every bump. You’ll be rewarded in the long run. Cash? That’s for wimps.”
Thanks for sharing. Even when I don’t agree with the comments posted online, I like to read them so I can get the other side of the story. If you haven’t shared yours yet, take a few moments to do so here at the Money and Markets website.

Other Developments of the Day

President Obama took to the airwaves for a primetime address yesterday, attempting to ease concerns about terrorism. He also vowed to step up the fight against ISIS, screen travelers more aggressively, and push for stricter gun controls.
Shares of fast casual restaurant chain Chipotle (CMG) plunged after it warned that the recent E. coli outbreak was hammering sales and profit. The company expects to earn just $2.45 to $2.85 on a per-share basis in the final three months of 2015, compared with $3.84 a year earlier. The Centers for Disease Control and Prevention has identified 52 E. coli infections in nine states that may be linked to Chipotle food.
Government opposition scuttled the sale of General Electric’s (GE) appliance division to Electrolux (ELUXY) of Sweden. The $3.3 billion acquisition would’ve given the second-largest global maker of home appliances too much market power in the view of the Department of Justice. Shares of Electrolux dropped more than 10% in their home market on the news.
The Wall Street Journal reported today on the trend I’ve been telling you about for months — namely, that the junk bond market is sending out warning signs about stocks and the economy. High-yield bonds have lost about 2% on the year, even including the higher interest payments they offer. That puts them on track for the first annual losses since the credit crisis.
Any thoughts on the failed appliance merger and its impact on GE shares? What about President Obama’s latest primetime address? And do you find it significant that the Journal is now highlighting the woes in the junk bond market? Tell me about it below.
Until next time,
Mike Larson
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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

The investment strategy and opinions expressed in this article are those of