Real Wealth #329 10/01/2015 12:45 PM EDT
I've been very quiet in the last 60 days. I have just closed our third model portfolio in the Gold and Energy. In all honesty I have been watching the precious metals, oil and natural gas markets for some valid signs that we finally putting in a bottom.
Few economists would argue that the danger of a deflationary spiral isn't of serious concern. The world outside the United States has been steadily slowing down in terms of economic growth. This economic slowdown, especially in China has literally hammered the price of virtually all commodity prices.
A couple of weeks ago, Goldman Sachs made the prediction that the deflationary pressures and economic slowdown is so serious they believe crude oil could fall all the way back to $20 a barrel!
The fact that oil production and exports from Iraq are falling dramatically and marginal producers of crude oil with costs of new production of $60 to $90 a barrel are either shutting down, or slowing production has had little impact on oil bears predictions of $30 even $20 a barrel.
The impact of current low market price for Crude Oil and WTI is literally pushing the Canadian, Venezuelan, Brazilian, Mexican and Russian economies into what could be catastrophic recessions, debt service and currency crisis.
Even Saudi Arabia, at the heart of the price collapse in oil is beginning to feel the economic strain of allowing the world price of oil to fall, in large part to their unwillingness to cut their production enough to remove the excess supply of oil from the market.
The incredibly wealthy Saudi's are experiencing a serious cash and foreign reserve draw down. This summer they sold over $4 billion in bonds. The first time Saudi Arabia has had to raise funds by selling bonds.
Now there are increasing reports that Saudi Arabia is pulling out cash from global asset management firms like BlackRock.
The Saudi central bank has already been forced to pull out $50 to $70 billion in the past six months according to those financial intelligence firms and analysts that follow these ebb and flows. The cash draw down comes from the need to shore up the country's domestic finances.
As the price of oil has fallen, the Saudi's have slip in to deficient spending. The deficit of course been also aggravated by an enormous spike in military and defense spending that looks like it will leap another 7.5% of GDP in 2016. A stark contrast to the 20% surpluses of GDP the kingdom had during the past 8 years. The spike in deficient spending has reduced the Saudi Central Bank have now fallen from $746 Billion in mid 2014 to $669 Billion at the end of this past July.
All of this has more implications than the financial strain on Saudi Arabia, which by the way is still spending like oil is still $100 a barrel. In just a few months the Kingdom has spent $5 to $8 billion conducting its military operations in tiny Yemen.
If crude oil falls to $30 or$20 a barrel...
The map of the world's governments could change dramatically. Long standing governments and regimes in the Middle-East, Africa, South and Central America that rely on oil revenues could be serious threatened.
Wall Street's volatility and sell off during the last several weeks may well been in part to outflows directly tied to Middle-East liquidations forced by the collapse in crude oil prices.
The impact on Russia's finances have also been dramatic. At the current market price of Crude Oil i.e. $45-$50 a barrel is already strangling Russia's economy, compounding the economic damages being imposed by the tough economic sanctions put in place in response to Russia's unilateral annexation of Crimea, and continued belligerence/interference in the Ukraine.
Russia's inflation rate is running at over 15% and its currency's valuation has fallen 40%.
Last Thursday Oppenheimer issued a note arguing that crude oil is looking for a "new normal" price around $65 to $75 a barrel. Referring to Goldman Sachs predictions of $20 as wrong as the firms prediction a few years ago, that oil would spike to $200 a barrel.
Oppenheimer in its comments...
"We dismiss the $20 oil scenario, as we dismissed the $200 oil view in 2008 — both came from the same source."
I'm have also predicted that crude oil will eventually rebound to $65-$75 a barrel, as we enter 2016, and this will become the "new normal".
A rise in the price of Crude Oil to the $65-$75 range, would be a jump of 25% to 40% from the current market price. Yet, despite my optimism for a rebound in the price of Crude Oil, oil stocks large and small have yet to confirm my bullish outlook in 2016. I have held back any new recommendations launching Gold and Energy's fourth (#4) portfolio in its more than a decade of existence.
There is however a catalyst beginning to take shape in the dynamics of the oil market that could force the price of oil substantially higher.
Russia's introduction of new supplies of military hardware including Jet fighters, Tanks and ordnances of all kinds to prop up and support Syria's Assad regime and declaration of a new Iraqi/Syrian/Iranian and Russian alliance sets the stage for a genuine World War.
While the Russian's insist the fight they are entering is against ISIL, ISIS, al Qaeda and the dozens of Sunni Terrorist organizations throughout the Middle-East. Yet, the first air attacks conducted by the Russian in Syria were against FREE SYRAIN forces that have been battling radical Islamist terrorists and Syria's dictator Assad.
The inescapable truth however is Iraqi/Syrian/Iranian and Russian is wholly a Shia Muslim alliance that threatens the all of the Sunni Muslim regimes. -Saudi Arabia and other Sunni oil kingdoms of the Middle-East. A Russian military presence in Syria and Iraq NOW threatens the continued existence of the regimes of Egypt, Jordon, Qatar, UAE, Turkey and possibly Israel.
Putin desperately wants to end U.S. and its allies Ukraine/ Crimea sanctions. In order to prop up the value of the Russian Rouble, jumpstart its economy it needs a sharp increase in the market price of Russia's number #1 export crude oil.
By injecting Russian military hardware and troops into the Syrian civil war Russia could easily drive the price of oil back up to the $65 to $75 a barrel. It's presence in Syria right next door to the Saudi Arabia could force the oil Kingdom and its oil producing allies of OPEC to cut oil production in a coordinated manner.
The Saudi decision to allow oil prices to drop so precipitously was directed at both U.S. Shale producers but also Russia that has been financing its enemies Iran and Syria for decades.
Putin's gambit in Syria is a sign of desperation, both to prop up the Assad regime in Syria but also to dramatically improve Russia's cash flow via higher oil prices. Putin's popularity with the Russian people is still VERY strong but with inflation getting worse, foreign goods disappearing and an economy in recession, he is taking the steps he feels he needs to literally black mail the price of crude oil back to $65-$75 a barrel.
This is alert serves as my first heads up that I will soon be launching Gold and Energy's 4th Oil portfolio since its inception in 2004.
Before I do start launching Gold and Energy's 4th portfolio let me qualify the direction of my intended recommendations.
I will focus entirely on U.S. Low cost oil and gas producers.
I WILL NOT recommend any Canadian or foreign based oil and gas producers.
The entire portfolio will be made up of domestic US oil and natural producers with a focus on takeover candidates like Apache (APA), Anadarko Petroleum (APC) to name a few. Sit tight and look for my first Gold and Energy portfolio #4 recommendations.
Please see risk disclosure link below.
Copyright ©2023 Finest Known, LLC. All rights reserved.