Wow! How inconsiderate is the market? So close to Christmas and it decides to start acting out. Doesn’t it understand Santa knows who has been naughty and nice? Aside from that, the market dropping so harshly right now takes money away from folks, which means they have less money to spend on their tiny, beautiful, cute children.
- U.S. manufacturing output recorded its largest increase in nine months in November as production expanded across the board, pointing to underlying strength in the economy.
- Industrial production surged in November by the most since May 2010 as U.S. assembly lines churned out more consumer goods and business equipment, signaling manufacturing is bolstering economic growth.
So, what is the point of the market going down? The fundamentals are in place, for sure, so, the only logical reason the market is tanking is that it just wants to be naughty. Oh sure, the talking heads and celebrity analysts are suggesting oil dropping so hard and so fast is the reason – the market is spooked about global economic growth – but is it really?
I mean, when you think about it, shouldn’t the market feel positive about the drop in oil prices? Yes, yes, I know the talk is about the effect of lower oil prices on emerging markets, the loss of jobs when US shale producers go out of business from debt default, and well, there are more, but the simple fact is that lower oil prices means cheaper fuel, and cheaper fuel means more money for consumers, which, in the end, will offset any negative fallout for the global economy from lower oil prices.
The larger question now debated amidst the din from the talking heads is why oil prices are dropping.
- The answer seems to have less to do with supply and demand and more to do with how oil is traded. In short, the slide in oil prices appears to be mainly investor-related, not based on fundamentals. For that reason, oil prices could rebound just as quickly and violently as they fell.
Sure, the up and down of oil prices has a lot to do with speculation, but the analyst above is wrong when he says it has nothing to do with supply and demand. China slowing down economically, for example, certainly creates a perception that demand will drop. As to the actual demand, well, the numbers are ambiguous on that, but my research points to a number that I deem credible. Check out the chart below.
So, given the US economic fundamentals point to an increase in US GDP growth, one can logically assume that even if oil consumption remains the same, demand will drop, and, as we all know now, especially after the comments from OPEC this past weekend, supply will continue to accumulate, even without Iran’s oil on the market.
Yet, the argument still rages – fundamentals or scared investors are driving the price of oil right now?
- Some 70% of all crude oil is used for transportation. Despite the viability of Tesla (TSLA) and the electric car, that industry is not yet challenging combustion engine vehicles as many had hoped. So Americans are likely to keep driving gas-guzzling cars, which will help oil prices find support.
First off, Americans in general are not predominately driving “gas-guzzling” cars. Many cars on US roads are way more energy efficient today than they were five years ago, heck, even two years ago. On top of that, sales of hybrid cars, all-electric cars, and flex-fuel cars are on the rise.
- 100% electric car sales increased 228.88% in 2013 compared to 2012. To a lesser extent — but still notable growth — plug-in hybrid electric sales increased 26.87% in that time period. In the end, annual sales of 100% electric cars (46,148) nearly reached annual sales of plug-in hybrid electric vehicles (48,951).
Projections for 2014 and beyond show large increases in the total sales of all alternative vehicles and one can now add to that the release of the first fuel-cell car from Honda in 2015.
- When will the carnage end? No one knows. But there are plenty of reasons why fundamentals may return soon and oil could start climbing again.
Sure, it is possible that if gasoline prices stay low for a long time, folks just might decide to go for less expensive cars, but me thinks the die is already cast – alternative fuel cars are here to stay because they too are becoming less expensive and folks will still want to spend less on fuel, even if gas is cheap, and they can do that with alternative fuel cars.
So there, I say! WTI crude oil is right about $55 today and the RBOB futures price of gas is just about $1.56, which speaks to my premise. Oh, and gold is below $1200 again, and the VIX is going down today, not up, which is just the opposite of the market.
So, should we be panicked that oil dropping is killing the market? Me thinks not. Just hang in there and let the market do its thing for now. It will be fine, sooner, rather than later.
While you are waiting, look for opportunity in the alternative-fuel car market, as well as the clean energy sector. Think CELS.
Trade in the day; invest in your life …
