TGIF! May 13, 2016

I have been traveling to Texas every year since 2004, to visit with loyal, longterm clients.  It was then that I began studying the Energy market in- person by visiting various shale plays that were just starting to ramp-up production. 2004 was the beginning of a major energy boom in the US, one that presented the opportunity for American energy independence as well as a major threat to some nations not that friendly to our way of life.  My boots were on the ground in Texas again last week.  My hat made the trip with me to Texas.  The traveling hat campaign is continuing in 2016.  Where will it show up next?  Stay tuned….

The price of oil influences all things political, geopolitical and economic around the globe.  It’s why we spend so much time studying and anticipating its price movements.  The price of West Texas Intermediate crude oil was $41 in May of 2004.  It’s $46 today, in May of 2016.  It’s been a wild ride for that $5 increase in 12 years. Oil hit a high of $147 in 2008.  It hit a low of $26 just 3 short months ago.  The hyper volatile oil price has had a significant impact on global markets.  Things changed in the Fall of 2014, when the Saudi’s broke from the OPEC party line and ramped-up production in attempt to drive competition out of the market.  $20 oil is a death-sentence for many companies and countries for that matter.  There is a tremendous amount of debt tied to oil in the financial system.  The system was extremely stressed.  It’s no surprise that the DOW and S&P hit their lows this year when oil hit bottom.  Consequently, the rise in oil has had a profound impact on stocks and bonds the world over.

The rally from $20’s to near $50 this Spring was a gift for the Energy industry and global markets as a whole.  The massive stress in the system that infected the credit markets have received great relief.  But things could change quickly if oil prices fall.  That was the biggest concern I saw on my trip.  Nobody I spoke with down there seemed to trust $40 oil, but they have enjoyed the rally from $26.   It’s as if they are worried that increased production would send prices lower again, so they’re holding back.  Today, there is the lowest rig count in the US since 2009.  Many companies have been using the elevated price to hedge out the rest of the year and 2017 for insurance and protection.  Importantly, you have to got out to 2019 to see $50 oil right now.  Industry people I met did not share the same optimism that many on Wall Street have. To me that’s telling.

4 years ago, hotels in oil country were packed and rig hands were sharing rooms as they worked different shifts.  Restaurants often times ran out of food daily and traffic was very congested.  Populations soared with temporary workers.  It was reminiscent of the California gold rush in 1849.  Conversely, there was very little traffic in the Eagle Ford shale of South Texas last week.   Over 70,000 jobs have been cut in Texas since the oil production peak in 2014.  Sentiment was low and economic stress was high.  There was a ton of traffic in Austin however, which is much more exposed to Tech and Health Care and real estate development.  Cranes and trucks are everywhere surrounding the state capital.

The US economy is no longer dependent on oil, but it sure does play an influence.  Renewable and alternative energy has come a long way and the future is bright for this young and growing sector.  We always have are eyes out for investment themes in renewable energy.  For now, oil does matter.  We can see oil moving above $50 later in the year, but think it goes lower first.  Oil is traded in US Dollars, and we see the Dollar going higher in the near-term, which will likely knock down oil prices a bit.  We anticipate more Market turbulence ahead as a result, with the DOW and S&P consolidating the recent rally within the existing elongated correction which began last Summer.

We’re all over it.  Have a nice weekend.  We’ll be back, dark and early on Monday.


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