Yesterday, Fed Chair Janet Yellen jawboned about raising interest rates — but in the end did not raise interest rates.
As we all know, Yellen can’t raise interest rates without destroying whatever fragile economy the world is developing.
For about eight months now, I’ve been telling you that the price of oil would go down to $33.
And Yellen just confirmed it will happen in Q2 2015.
Here is the dollar chart. Oil is priced in dollars. When the value of the dollar goes up, the price of oil must go down…
That chart looks a bit toppy to me. But the rest of the world is in a currency war — a race to the bottom.
Are you going to buy euros when the EUR/USD is at $1.06? That’s almost parity. Besides, euro bonds pay a negative interest rate. You are better off buying Indonesian government bonds at 6.5%.
Countries think that cheaper currency is better because exports increase and there are more jobs. It doesn’t matter that national wealth decreases.
Here is the long-term oil chart going back to the 2009 financial crisis:
Oil is falling because the global economy is slowing and the world is swimming in oil. Fitch predicts a 3.6% global GDP growth, down from 6.9% in 2010 — though they expect a rebound in 2016.
Business Insider writes, “The U.S. has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months.”
Crude Facts
As I write this, crude oil is trading at $44.93. Gold is at $1,164, and copper is at $2.63.
As you can see by the oil chart above, we hit $33 a barrel in 2009. In the next three months, the oil price will hit that and bounce. This will coincide with the high-priced oil hedges from last year running out.
I’ll be buying at $34 just to be sure I catch the rebound.
Right now, I am buying two countries that will benefit from low oil prices: the Philippines and India. They are both large importers of oil. Both of these countries’ economies are expanding, and their stock markets are going up as well. In Crisis and Opportunity, I am in both.
Our analysts have traveled the world over, dedicated to finding the best and most profitable investments in the global energy markets. All you have to do to join our Energy and Capital investment community is sign up for the daily newsletter below.
Death of a Supercycle
Commodities have taken a beating over the past five years. But something interesting has happened recently…
Here is a chart of the Chinese stock market versus the price of copper:
As you can see, there has been a divergence. It is the market fashion to hate on Chinese equities these days, but as you can tell, the market has doubled since 2011.
As the new government cleans up corruption and shuts down the shadow banks, money is flowing from failed real estate deals and into the stock market. So while Chinese GDP slows, its central bank eases and stocks go up. China is also a big importer of oil.
Copper is no longer tracking the Chinese equity market because the real estate boom has ended.
Contrarian Play: The Steel Makers
Yesterday, I noticed that call options on steel producers were seeing a volume spike. Nucor (NYSE: NUE) saw call option volume increase from around 2,500 to 12,400 two days ago.
The smart money thinks the sell-off in steel is overdone and will reverse. You see, despite increased efficiencies and a booming car market, the strong dollar has made imports more competitive than U.S. producers.
The Financial Times reports:
US motor sales of about 17m a year are close to pre-financial crisis highs. Non-residential construction and manufacturing indicators are also strong. The problem for US producers was an import surge enabled by slowing consumption in China and the rising dollar. The price for benchmark US hot-rolled coil steel is down to $492/tonne, a level not seen since mid-2009; last August the price was $680/t. Monthly imports have averaged well above 3.5m tonnes a month since early 2014, after averaging about 2.5m tonnes in 2012 and 2013.
Again, this trend could be changing. Oil pipelines are still expanding at a record pace.
If the dollar reverses, steel producers like United States Steel Corp. (NYSE: X) could more than double.
As you can see by the chart, the downtrend has broken, there is support at $20, and the chart put in higher lows/a double bottom.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
