Monday, December 1, 2014
Stocks are indicated to start today’s session on the weak side, with soft PMI readings from China and Europe and the spotlight on oil prices weighing on sentiment. The unexpected drop in oil prices to 5-year lows in recent days has been particularly notable.
Prices appear to be relatively steady today, but Friday’s abbreviated session saw a sharp reaction to OPEC’s declaration of war on U.S. shale producers. No doubt Bakken-centric producers like Continental Resources (CLR) and Marathon (MRO) were hit hard by the Friday sell-off. The OPEC move effectively guarantees continued downward pressure on prices, though the economics of U.S. shale production would argue for not that much downside risk from current levels after the more than 35% slide in prices from summer highs.
The total cost of producing a barrel of oil in the Bakken shale is in the $60 to $70 range, while globally it’s about $25. In the long run, oil prices are expected to be about 2.5x to 3x finding and development costs, which means global oil prices should be in the $75 to $90 range in the long run. That said, prices can, and typically do, diverge from long-run trend lines in the short run.
The oil price slide is coming as a boon for consumers, both in the U.S. as well as abroad. This is expected to have a beneficial effect on U.S. consumer spending this holiday season and should help the growth profile for emerging markets like China and India.
China’s growth outlook has been problematic for quite some time, and today’s factory sector data shows that it continues to lose steam. The country’s official factory sector PMI reading for November dropped to its lowest level since March, confirming the trend we had been seeing in private-sector PMI measures. Chinese stocks were up on Monday despite the soft manufacturing data, likely reflecting hopes of continued monetary policy support. The country’s central bank lowered interest rates last month, though the move doesn’t seem to have had much of an impact at this stage.
Sheraz Mian
Director of Research
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