If you’ve ever lived in Texas, you get used to the same repetitious weather forecast in the summer. Hot, continued hot, followed by a warming trend toward the end of the week. Flip that over and that’s pretty much the stock market report for all of 2016 so far. The market is down, the market is down, the market is…you get the picture.
With that build up I’m sure it will come as a complete shock to find out that the market is down in early trading on Wednesday. The usual suspect for down market these days is oil prices, which took another step below thirty dollars a barrel to twenty seven dollars. West Texas crude was just over twenty six dollars a barrel, meaning budget and employment woes for the state of Texas are going to continue.
Adding fuel to the fire, crude oil futures were down another four percent. Oil prices are down and oil prices are going to stay down, at least for another month, the following quarter and probably most of 2016.
That’s Bad News
While most of us are laughing all the way to the gas station these days, the oil price crash is really bad news on many fronts. The slight bump in consumer spending will be more than offset by looming oil company defaults in the near future. Already auditors are looking over the books of oil companies, many of which have quite a lot of outstanding debt, and deciding on whether they can continue to operate as a going concern. The day the answer comes back “no” is the day oil company bankruptcies will start blooming like Bluebonnets along a Texas highway in the spring.
Just a reminder that we’re going to need oil for the indefinite future. Sure, we’re making great strides in cutting our dependence on oil and we should continue with those efforts but low gas prices encourage people to buy less fuel efficient vehicles.
Nowhere To Store It All
Perhaps the most peculiar problem with the oil glut is that we’re running out of places to store it. Oil storage facilities and strategic reserves are nearing capacity. When that happens oil will, in quite literal terms, be backing up in the pipeline. If there are delays unloading oil tankers, the refinery will end up paying geometrically more for storage while oil tankers, which are very expensive to operate, sit around and rust waiting to unload their cargo.
OPEC Issues Bold Statement Of The Obvious
OPEC, which is mostly Saudi Arabia, issued a statement that the oil surplus is getting bad. It goes on to state that a continued excess production would keep continued downward pressure on prices. Thanks for that 411, Captain Obvious, particularly when it’s Saudi Arabia that’s primarily responsible for the oil glut in the first place!
Meanwhile, Federal Reserve Chairman Janet Yellen, reiterated the Fed’s plan to gradually raise interest rates. Which means all those oil companies, already on the brink of default, will be facing higher borrowing costs ahead. Fire meet gasoline.
The next few months is definitely not the time to go all in on stocks and a smart investor would be looking for ways to shelter their cash from banks and the possibility of runaway energy inflation.
