The big news continues to be the fall in oil, which gained even more downward momentum when Saudi Arabia pushed back on a proposed production cut at the Organization of Petroleum Exporting Countries (OPEC) meeting last Thursday. Now, some are calling for $60 a barrel before the commodity finds a bottom. There is no doubt a global oil glut is being exacerbated by slowing economies from Europe to China to South America. However, the pace of this sell-off is mind-boggling.
This has been devastating news for American oil producers heretofore winners from the fracking miracle. Break-even production began at $75 for drillers in Bakken and the Permian Basin, and a start of $65 for Eagle Ford in Texas.
The trade-off for most Americans is more than worth a few jobs in North Dakota. Other elements to freefalling crude oil go beyond the mysterious motivations of Saudi Arabia.
Experts say the goal is to derail the US fracing miracle; others say our Saudi friends are helping America humble the Russian bear, and still, others think it is another proxy for the Sunni v. Shia war. On Friday, Stephen Schork of The Schork Report shared his theory with me on how Sunni Saudi is looking to punish Shia Iran.
Either way, it is a dangerous gambit that could create geopolitical risks. Take a look at the break-even points for OPEC members.
It is clear that outside of the Gulf States, plunging oil prices pose the kind of danger that will result in geopolitical instability and civil strife. The wild card is what will Russia resort to, after losing $140 billion this winter?
The benefits to the United States are obviously cheaper gas, which is a big deal for consumers, but how does it play out for the economy and the stock market? Over the weekend, consumer spending decreased 11% to $50.9 billion from a year earlier. Ironically, the National Retail Federation says the huge decline in sales is a reflection of a "strong" economy.
Stocks were under pressure all morning long as the winning streak needs a boost in the form of good news. The idea that lower than expected retail sales is good news is a bit farfetched and I'm becoming worried about the enthusiasm from cheaper oil not transferring to a pickup in other parts of the economy. I've said several times over the past month that cheap oil isn't a panacea or magic elixir. In the past, it's pointed to lower demand from a weaker economy. The global economy is under pressure and while the US is shining versus its rivals, there are changing dynamics on demand (fewer drivers).
Weaker Global Economy November PMI
- China 50.3 (estimate 50.6)
- Euro-Zone 50.1 from 50.6 October
- Germany 49.5 at 17-month low
- France 48.4 at 3-month low
Look for oil names to pressure the overall indices, but the selling is now in the absurd camp with names off 50% or more from recent highs.