Oil’s tumble caused investors to see more losses Thursday, while short-term short-sellers enjoyed volatility and strong downtrends in both stocks and commodities.
By Vikram Rangala
Friday, December 11, 2015
Oil’s ongoing slide and the Fed’s upcoming meeting were the major drivers of a widespread drop in US and most major global stock markets. Commodities dropped as well, led by crude oil’s first drop below $36 a barrel and what is likely to be its worst week since March.
Bond traders saw a rally as investors moved money out of stocks into Treasuries, in anticipation of higher interest rates after the Federal Reserve’s meeting next week.
A flurry of economic news caused temporary fluctuations in the trend, but overall the selling continued into Friday morning, with the S&P 500 hitting a low of 2011.25 before 11 AM EST. That is the lowest level since mid-November. Below lie the psychologically important 2000 level and technical resistance around 1975.
Those following the oil market news had to brush up on a trading term, “contango.” Contango describes a situation when future prices are expected to be higher than the current, or spot price. In 2008, when oil prices plummeted due to the global economic slowdown, oil companies like Bp stored oil on tankers, keeping it off the market until prices rose. In other words, they profited from the contango.
It worked in 2008. The added cost of buying those cheap, old tanker ships was offset by the profits they eventually recouped as oil demand picked up again. In 2015, the situation is different; there is no contango. With so much OPEC oil flooding the already glutted market, not only is the world actually running out of storage tankers on land and sea, few people see any end in the near future.
In other words, the future price is expected to be as low as the current spot price, because future demand and supply are expected to be the same. No contango. That adds pressure to oil prices because people aren’t even buying it to store it to sell later.
The pressure from low oil prices has overshadowed some positive economic news. Consumer confidence rose to a four-month high. Most analysts attribute this to oil prices as well: cheaper gas and heating fuel costs means consumers keep more of their money. While the tendency has been for consumers to save rather than spend that extra cash, November saw the largest jump in retail sales in four months.
The University of Michigan’s consumer survey pointed specifically to the bottom two-thirds of income earners, who have cheaper gas prices as well as better job prospects. However, the survey also said those consumers were doubtful about any rise in wages.
Those sentiments are in line with the actual numbers. Payrolls climbed by 211,000 in November and the unemployment rate has held at the Fed’s target rate of 5 percent, according to Labor Department data released last week. Hourly wages, however, grew a disappointing—and economically troublesome—2.3 percent in November compared to this time in 2014.
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