The commodities market moves much faster than television networks. The producers of the new ABC show “Blood & Oil” are learning this the hard way. The series follows the story of a young couple who moves to North Dakota after the biggest oil discovery in American history.
The show was written a few years ago when Oil was still trading above $100 and the oil boom in North Dakota was in full effect. By the time the show was picked up by ABC, cast, and filmed, the price of Crude Oil had suffered one of its steepest declines in history. The oil boom in North Dakota had went bust.
From its peak in 2011 to its low in August of this year, Crude Oil declined over 66%. Going back in history, only the 1985-86 decline of 67% and the 2008-09 decline of 76% exceeded this drop.
The persistence of the recent decline is perhaps even more remarkable. At 304 trading days, this is now the longest Crude Oil has traded below its 200-day moving average in history.
The effects of the decline in Crude have been far reaching…
- S&P 500 earnings have declined for 3 consecutive quarters, due in part to the significant drop in the profits from Energy companies.
- Credit markets have deteriorated due in part to the anticipation of higher defaults in the energy sector. U.S. high yield credit spreads recently traded at their widest levels since 2012.
- The world of distressed investing actually saw some distress again, with one bond index trading down over 50% since June 2014.
- Currencies and economies tied to the price of Crude suffered, with the Russian economy (-4.6% GDP growth year-over-year) and the ruble falling.
- Inflation around the developed world tumbled, dropping below 0% (year-over-year) in the U.S. for only the second time in the past 30 years.
So Goes Crude, So Goes…
The direction of Crude from here will be critically important for the global economy, credit markets, interest rates, inflation, and global central bank policy.
As it slowly approaches its 200-day moving average (currently at $50.89) with the chance of ending that ignominious streak, it is actually trading at a higher level than mid-January, nine months ago. This is a potential sign of stability that has been missing from the volatile oil market for some time (for our award-winning research on commodities and volatility, click here). Following prior streaks below the 200-day moving average with declines greater than 10%, Crude has tended to move higher over the following year.
To the extent that Crude can stabilize and perhaps mount a more sustainable rally, it will catch many of those calling for outright deflation and $20 oil off guard. Even a move back to $60 (where it traded as recently in June) would likely coincide with a significant upward shift in inflation expectations and important ramifications for markets. On the other hand, if Oil continues lower here and calls for $20 are correct, it would be the largest decline in history. If that were to occur, I could envision a new television series centered on the “terrifying” consequences of the Oil bust, written and directed by none other than Jeff Gundlach.
“I hope it [Crude Oil] does not go to $40, because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.” – Jeff Gundlach, December 2014
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of two award-winning research papers on Intermarket Analysis. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.