- Why Saudi Arabia’s new crude oil strategy is set to backfire
- A safe-haven energy investment while oil prices swoon
- Ritholtz suggests the “easy money’s been made” in stocks… So now what?
- Europe in trouble: Why Neil George isn’t hitting the panic button
- Painful proof real estate is all about location, location, location… The day e-commerce grinds to a halt?… Reader asks us to stop running reader emails (gasp!)… and more!
Hmmm… Crude seems to be holding the line on $80 a barrel. For now anyway.
After testing $80 a couple of times this week, West Texas Intermediate clocks in as we write at $83.47.
But to hear it from our resident oil field geologist, it’s the proverbial dead cat bounce…
“We’re about to live through a ‘manmade disaster’ in oil prices, as they tumble to new lows,” says Byron King.
“This could be followed by a price recovery and rebound that could accelerate and overshoot any sort of safe price margins. It’s going to be a pricing yo-yo, with economy-wrecking volatility.”
On Tuesday, Byron explained why the princes of Saudi Arabia were no longer following their usual script of cutting production when the price falls. In short, they don’t want to give up market share and lose longtime steady customers at a time America’s shale bounty is shaking up the global marketplace.
That is, the princes are responding to the reality of this chart…
“From all appearances,” Byron says today, “Saudi leaders want to test the downside economics of North American fracking, Canadian oil sands and probably future deep-water plays.
“In other words, the Saudis want to undermine future competition from newly evolving oil resources.”
How low will they tolerate oil prices? Reuters cited Saudi Arabian officials this week who “will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two.”
Expect the strategy to backfire, big-time: “Unless the Saudis pull a quick about-face, we’ll see oil prices crash down in the next few months,” says Byron.
“How low? Well… strong likelihood into the $60-50 range. It’ll be a price and cash flow catastrophe for many an oil producer, private and government.”
Understand it won’t put U.S. shale producers out of business: “From what I’ve seen and heard during many visits to shale and oil sand operators,” says Byron, “many significant projects can squeak by on oil prices as low as $50 per barrel. Sure, the operators would rather have $100 oil, or $80, but they can keep the lights on at $50, as well.”
The most serious threat $60 or $50 oil poses is to the Saudi princes themselves.
This week, one of those princes, Al-Waleed bin Talal, reiterated a warning we passed along in late July: The government of Saudi Arabia needs $90 oil because 90% of the government budget depends on oil revenue.
Absent $90 oil, “Saudi leaders will be faced with worrisome choices,” says Byron. “One option is to cut spending, which will be near impossible in the Saudi petro-welfare state. The nation has a longstanding social compact in which generous benefits help keep potential civil and political unrest under wraps.”
No doubt: The Saudi princes are Sunni Muslims. The people who live closest to the oil fields are Shia Muslims. There’s nearly 1,400 years of bad blood between these two major branches of Islam. The House of Saud needs $90 oil to buy off the Shia and keep them pliant.
Could get interesting…
So where’s a safe place for energy investors to hide out?
“Even with oil prices falling since August, the utility sector is gaining steam,” says Matt Insley of our energy desk. “It’s the energy safety trade.”
The charts, he says, look good on both Duke Energy (DUK) and Consolidated Edison (ED). Both have risen steadily this month and pay a 4% dividend — with the next payout due next month.
“With pressure continuing to weigh on the oil market and U.S. oil producers, now’s the time to make sure your portfolio has some safe dividend exposure,” Matt concludes. “Utilities are the clear winner there.”
Stock traders have put on their rally caps as a volatile week comes to a close.
After closing flat yesterday, the Dow has tacked on more than 200 points, to 16,337 at last check. And the S&P is adding to its gains yesterday, up 25 points, to 1,887. What looked like another down day yesterday suddenly turned up when St. Louis Fed chief James Bullard said
it might be time to suspend the process of “tapering” the Fed’s money printing program known as “quantitative easing.”
(One day, traders will stop hanging on every word of every Fed governor and start paying heed again to things like, you know, sales and profits. But we’re nowhere near that yet.)
Today’s rally notwithstanding, the market has entered a phase shift, money manager and prolific blogger Barry Ritholtz writes.
“It’s been a great ride since the lows of March 2009. Those that were lucky enough to jump on board enjoyed a few years of relatively easy money. My strong suspicion is that period is over.
“The sledding gets much more challenging from here. It isn’t that there may not be more upside; it’s that whatever upside there is will be trickier than what’s come before.”
How to navigate it? Well, would you believe you can apply the same sort of “big data” techniques used by the NSA to project medium-term stock market moves… and pull in north of $2,500 a week?
It’s true. We’ll tell you more about it on Monday. But if we’ve already piqued your curiosity, just drop us your email address and you’ll be assured access to a presentation — and four days of training — letting you in on these trading secrets. The training sessions won’t cost you a penny. Click here to sign up.
Gold has slipped a bit in the last 24 hours. At last check, the bid was $1,234.
“I’m not ready to throw in the towel on Europe,” says our income specialist Neil George.
There’s no shortage of fretting about Europe these days, to wit, the front page of today’s Wall Street Journal: “Echoes of the debt crisis reverberated across the eurozone Thursday amid mounting concern about the region’s stalled economic recovery and gridlock in the political system called upon to fix it.”
Neil says yes, those concerns are valid: “Many of the governments within the EU still have yet to clean up their debts and deficits, many of which stem from the 2007-08 financial crisis. And after back-and-forth bouts of stimulus and fiscal reforms, Europe still is in an economic malaise.
“Obviously, these developments are worrying investors, who expect citizens of the world’s fourth largest economy to start consuming less. This means a weaker euro and potentially fewer imports from around the world and less investment capital from Europe to the rest of the world.”
Neil’s Lifetime Income Report readers have some European exposure, but he says it’s not time to panic: “None of our companies requires massive growth to function. They need only modest stability to keep their dividends coming.”
The home sounds like a gem — 5,300 square feet, five bedrooms, 5½ baths, theater, game room, swimming pool.
Too bad it was built on the wrong lot.
A couple from Linn, Missouri, decided to have the house built on some ocean-view property they own north of Daytona Beach, Florida. Unfortunately, the builder built it on a lot next door.
Seems two state-certified surveyors managed to foul up — in part because the subdivision is so new, it lacks landmarks that might have pointed out the mistake.
“There is no giant oak tree on one corner of the lot so you would say, OK, this must be the lot. This particular piece of land is basically in a field back behind the dune,” said Carl Laundrie, a spokesman for the government of Flagler County.
Reuters couldn’t squeeze a comment from either the homeowner or the lot owner… and definitely not the builder. The county property appraiser did say he spoke to the builder. “All he wants to do is get it right,” says Jay Gardner. “It happens from time to time.”
“I think by now even the thickest dummy understands that the dollar is not ‘money,'” a reader writes. “No currency is.
“But neither is gold or silver. If the disaster comes, you won’t have much luck trading useless gold coins or bars for food, water, gas, etc. You can’t counterfeit these useful commodities. So if you want to save for the future disaster, rent a warehouse and stock up on canned goods, nuts and MREs. That will fill people’s bellies.
“Or build some hidden underground tanks and store diesel, but be sure to add stabilizer, because all hydrocarbons have a storage life, as they will form polymers (gum) over time.
“But unlike any other currency, the U.S. dollar is the world’s best IOU because it is backed by the depth and productivity of the U.S. economy. This is further strengthened by our surplus of food and now energy. This is why the whole world runs to the dollar in times of uncertainty.”
The 5: Until it no longer does.
We don’t know when the music will stop, but stop it will, as we’ve learned from our discussions with Jim Rickards both before and since he joined the Agora Financial team.
Phase two of our Prophesy 2015 project with Jim launches in a few days. Stay tuned…
“What are you/your business going to do once the Internet becomes too risky to use for anything other than innocuous things?”
A reader saw our latest write-up about the Internet of Things on Wednesday and forwarded us a cybersecurity trade newsletter. It posed that very question, and then followed up with this comment…
“With the growth in numbers of criminals/hackers, the growth in types and virulence of malware, the growth in automated capabilities, the development and growth of a complete criminal marketplace, the growth in connections (devices) and the ability of anyone ANYWHERE in the world to attack connected networks, systems and individual devices, that day may not be faraway.”
The implication is that e-commerce of the sort we’ve taken for granted these last 15-plus years is at risk of grinding to a halt, and the Internet will be good only for “innocuous things” like cat videos.
Heh… Of course, the newsletter is published by an outfit that offers “cybersecurity threat and vulnerability consulting.” Their whole reason for being is to keep e-commerce — or “noninnocuous” activities, if you will — humming.
We have every confidence that with the profit incentive, cyberentrepreneurs will help business stay one step ahead of the criminals and hackers. And yes, there’s a way to grab a share of those profits — as we explain right here.
“Please stop publishing reader comments,” writes our final correspondent. “What you get is not what I pay for. I want advice from pros, not amateurs.
“I’ve seen it many times. Reader comments degrade to readers commenting on readers — which provides no useful information but satisfies some reader’s ego.
“I pay for your comments and knowledge — not someone else’s.”
The 5: Huh?
In the first place, you always get what you pay for — The 5 is a free supplement to your paid subscription.
From the beginning, when our executive publisher Addison Wiggin launched this e-letter in April 2007, reader feedback has been an essential ingredient in the tasty stew we call The 5.
We have a lot of smart readers with interesting things to say. And on the occasions they say something foolish, that only enhances the entertainment value…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
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