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Oil Gloom: Facts Get in the Way

Wednesday, June 24, 2015
Money and Markets
You can also access this issue on our website.
Oil Doom and Gloom: Facts Get in the Way
Market Roundup
Dow -178 to 17,966.07
S&P -15.62 to 2,108.58
NASDAQ -37.68 to 5,122.41
10-YR Yield -.038 to 2.371%
Gold -$2.70 to $1,173.90
Oil -$0.75 to $60.26

By Mike Larson

I’ve heard a lot of doom and gloom about energy on CNBC and in other mainstream press. Supplies are out of control. Demand stinks. We’re going to have a glut for the next 100 years, so sell everything.

It’d all be great advice … if only those pesky facts didn’t keep getting in the way. Facts like this: Crude oil inventories are tanking. Yes, tanking!

The Energy Information Administration (EIA) just reported this morning that U.S. crude oil inventories dropped 4.9 million barrels in the most recent week. That was more than double the average forecast of analysts.

U.S. crude oil inventories dropped 4.9 million barrels in the most recent week, more than double the average forecast of analysts.

It was also the eighth straight weekly drop. Do you know how far back you have to go to find eight consecutive inventory declines? I’ll tell you: The end of 2007, roughly seven-and-a-half years ago.

What about the Cushing oil depot in Oklahoma, the one the media was saying would literally overflow a few months ago? Supplies there plunged another 1.9 million barrels.

While I’m at it, I’d also point out the U.S. oil drilling rig count just dropped for the 28th consecutive week. That’s the longest streak in U.S. history, and it leaves rig activity down a whopping 61% from its October peak.

Call me crazy if you want. But when I see the biggest decline in drilling activity ever … the longest streak of inventory declines since before the Great Recession … and increases in energy demand forecasts from respected sources, I see plenty of reasons for optimism. Optimism that the supply-demand imbalance that beat energy shares down in the first place is well on its way to being fixed.

“I’m optimistic that the supply-demand imbalance is well on its way to being fixed.”

Or to cut to the chase: Forget the out-of-date, backward-looking talk in the mainstream press, and start digging for bargains in the oil patch.

Thoughts on the latest inventory data? The outlook for demand? The seemingly never-ending pessimism on this sector, despite concrete evidence of a turn starting to get underway? I want to hear from you – and the Money and Markets website is the best place for you to weigh in.

Our Readers Speak

Greece temporarily moved off the electronic “front page” yesterday, in light of the release of fresh housing data. I pointed out that the spring selling season went fairly well, as I expected, and many of you weighed in with your own thoughts.

Reader Jean had a fairly optimistic outlook, at least as long as financing costs stay reasonable. The comments: “As long as interest rates are kept low, there will be decent to good activity, as first-home buyers move on up and those just entering the market can have a chance to buy.

“Also, investors will continue to buy and rehab and resell, keeping the cycle going and improving the landscape. No one wants to rent when they can afford to buy and that is best for everyone, especially young families.”

Reader Glenn tempered the enthusiasm somewhat by noting that home construction still remains well below normal levels even now. His take: “I spent 30 years in the wood products business from 1969 to 1999 and really good years were 2-million-plus new starts. So-so years were 1.4 million to 1.5 million.

“Our population has obviously increased a lot in the intervening years, the inventory of homes is much older, and when you are talking about 522,000 new starts … well, that really does speak to the economy and demand/ability to purchase big ticket items. We have a long way to go.”

Reader Charley offered a regional perspective from out West, saying: “Denver, Colorado has seen housing shortages for remodels or fix and flip. Some remodeling contractors are going to building new houses because of it. Often prices are being upped at the table to purchase. Good for sellers.

“I wonder if this is the last hurrah ’til it turns south for at least a breather. Many of those fix and flippers actually kept the homes for rentals. So if the market turns south, it may accelerate south big time as those investors panic.”

Finally, Reader Mike S. zeroed in on interest rates as the thing that could upset the apple cart again. His observations: “The cycle of boom and now coming bust is when mortgage rates hit 5.5 percent. No one in their right mind should buy now. People who buy now at these elevated prices because of low interest rates will not be able to sell their house without taking a hit.

“Do the math: A 450k mortgage, 4 percent, 30-year mortgage … versus a 5.5 percent payment. A large portion of buyers will not be able to qualify at those elevated levels. So prices will come down.”

Thanks for all the well-reasoned comments. As the interest-rate and real-estate specialist at Weiss, I agree that financing costs are a major issue down the pike.

If employment and wage growth rises at the same time as interest rates, the market could continue to hold up fairly well. But we haven’t seen the kind of strong, 1990s-style wage expansion we need for years. So that may be too much wishful thinking coming from the real estate industry.

If you didn’t add your thoughts yet, I encourage you to do so when you get a chance. Here’s the link.

Other Developments of the Day

BulletThe massive hacking attack that targeted federal government employees recently could be followed by others. Why? Because the government’s “Einstein” security system has problems ranging from delays in implementation to vulnerability to new threats that don’t at least have signatures of past attacks.

BulletThink you’re starved for income in this low-rate world? Well, pension funds and life insurers are in even worse shape – because they’ve made long-term promises based on the assumption much higher rates of return would be available from lower-risk bonds. The Organisation for Economic Co-operation (OECD) is now warning many face solvency threats because they can’t earn anywhere near enough to cover the promises they made to beneficiaries. Just another reason why the Federal Reserve should’ve moved rates off zero a long time ago!

BulletWhat’s the biggest terrorist threat America faces on its own soil? Not attacks from radical Muslims, but rather killings launched by homegrown white supremacists and anti-government fanatics. That’s according to a new analysis covered in the New York Times, and it goes against conventional wisdom.

BulletIf you’ve always wanted to get in touch with your inner Marty McFly, you might get your chance before long. Toyota has reportedly produced the first prototype hoverboard, which would allow users to glide along a few inches above the ground – just like McFly did in the Back to the Future movies. More information is set to be released in October.

Worried about more computer breaches? Have any thoughts on homegrown terrorist attacks in America, in the wake of the recent South Carolina tragedy? Then let me hear about your thoughts on those or other stories in the news over at the website.

Until next time,

Mike Larson 

P.S. Don’t miss the deadline for Charter Enrollment in Dr. Martin Weiss’ Ultimate Portfolio that expires this Friday, June 26 at 4:00 PM Eastern Time. Click here to learn how Dr. Weiss could help you multiply your money with the stock-picking strategy that would have handed you 649% gain since 2005!
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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