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Drowning Santa

12/18/2015

Finally, the Fed raised interest rates a small amount.  The stock market rallied a few days, as it always does when some uncertainty is reduced.  Now, it has suddenly remembered “oh, yeah, we have that major uncertainty about the energy business.”

That uncertainty is not going away anytime soon!  And, without a recovery in energy prices, the high-yield market cannot recover, as so many junk bonds were issued to pay for fracking expenses.

The world produces somewhere between 1-2 millions barrels of oil too much every day.  This means inventory levels or “overhang” is increasing every day, putting downward pressure on prices.

Fracking accounts for only 3-4% of daily oil production worldwide.  Shutting down these high-cost producers will not solve the energy problems.

Average annual increase in temps worldwide are 20% higher this year than last, reducing the demand for heating oil.  How do we lower temperatures worldwide?

Speculators have long been the traditional savior of the energy business, by bidding up the price of oil when they think bottom prices have been established.  But, they are scared to participate, because nobody knows what happens when the Iranian oil enters the market.  That is another 400 thousand gallons a day that the market doesn’t need.  (Goldman Sachs predicts oil could fall to $20/bbl.)

Now, it looks like the U.S. will start exporting oil, further flooding the oil market worldwide and further weakening prices.

Normally, we look forward to a “Santa Claus” rally this time of year.  Unfortunately, it looks like Santa and Rudolph are drowning in oil, instead of delivering stock market gains.

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