Thursday, November 6, 2014
Stocks likely won’t do much in today’s session after reaching record levels yesterday on favorable conclusions to the midterms and positive economic data. We don’t have any positive catalyst in today’s session, with oil prices sliding back, Mario Draghi unable to match his rhetoric with action, and a day ahead of the October non-farm payrolls report.
We discuss Europe and the ECB all the time in this space. But I wouldn’t do that today, despite the ECB’s inaction in their meeting today. Mr. Draghi has yet to start speaking as I finalize this morning write-up, but I think I am speaking for many that the market needs more than just words and future plans at this stage – it needs specific details and actions, along the lines of what the Bank of Japan recently did and what the U.S. Fed recently concluded.
My focus today is on oil prices and what the recent slide tells us about the commodity’s near-term outlook.
It is hard to tell what gave us this unexpected slide – benchmark oil prices are now off more than 25% from their summer highs. The list of factors ranges from fundamental forces such as the shale oil boom in the U.S. and depressed global demand from lower global growth to the Saudi market maneuvering, as well as geostrategic factors including the face-off with Russia over Ukraine.
Even harder to tell is how much more downside there is to oil prices. Prices rebounded somewhat on Wednesday on better U.S. inventory data, but they’ve appeared to lose ground again today and the overall sentiment remains weak, indicating that more downside risk remains.
That said, prices even at current levels will have a bearing on supplies, particularly if they remain at these levels for an extended period. That’s a function of the marketplace’s corrective action in responding to movements in oil prices. The global oil majors like Exxon (XOM), Chevron (CVX) and BP (BP) can operate profitably in very low oil price environments. But that isn’t the case for many others, particularly those operating in high-cost regions like the shale producers. In fact, for many shale produces, the ‘all-in’ finding and development costs aren’t that far from benchmark oil prices close to $70 a barrel.
Geopolitical factors are hard to handicap, and they could push oil prices in either direction from here. But the risk of further downside from current levels is limited when looked at from a fundamentals standpoint.
Sheraz Mian
Director of Research
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