• 1 hour Russia, Saudis Team Up To Boost Fracking Tech
  • 7 hours Conflicting News Spurs Doubt On Aramco IPO
  • 8 hours Exxon Starts Production At New Refinery In Texas
  • 10 hours Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 1 day Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 1 day Oil Gains Spur Growth In Canada’s Oil Cities
  • 1 day China To Take 5% Of Rosneft’s Output In New Deal
  • 1 day UAE Oil Giant Seeks Partnership For Possible IPO
  • 1 day Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 1 day VW Fails To Secure Critical Commodity For EVs
  • 1 day Enbridge Pipeline Expansion Finally Approved
  • 1 day Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 1 day OPEC Oil Deal Compliance Falls To 86%
  • 2 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 2 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 2 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 2 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 2 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 2 days Aramco Says No Plans To Shelve IPO
  • 5 days Trump Passes Iran Nuclear Deal Back to Congress
  • 5 days Texas Shutters More Coal-Fired Plants
  • 5 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 5 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 5 days Chevron Quits Australian Deepwater Oil Exploration
  • 6 days Europe Braces For End Of Iran Nuclear Deal
  • 6 days Renewable Energy Startup Powering Native American Protest Camp
  • 6 days Husky Energy Set To Restart Pipeline
  • 6 days Russia, Morocco Sign String Of Energy And Military Deals
  • 6 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 6 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 6 days India Needs Help To Boost Oil Production
  • 6 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 6 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 6 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
  • 6 days District Judge Rules Dakota Access Can Continue Operating
  • 7 days Surprise Oil Inventory Build Shocks Markets
  • 7 days France’s Biggest Listed Bank To Stop Funding Shale, Oil Sands Projects
  • 7 days Syria’s Kurds Aim To Control Oil-Rich Areas
  • 7 days Chinese Teapots Create $5B JV To Compete With State Firms
  • 7 days Oil M&A Deals Set To Rise
Global Energy Advisory 13th October 2017

Global Energy Advisory 13th October 2017

Tensions between Iran and the…

Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

More Info

Uncertainty Looms Over Global Markets In 2016

It’s very clear that both the industrial and manufacturing sectors are in recession while consumer spending slows but remains positive despite lower commodity prices. This divergence can be blamed at least in part on the Federal Reserve’s policy of pursuing a stronger dollar.

The road ahead in 2016 will most likely hold more of the same for both the U.S. economy and commodities despite oil markets gradually rebalancing in supply demand as U.S. production declines. The weakening economy will most likely result in tepid returns in U.S. equities in 2016 after a rather tepid year in 2015. Looking at just a few large cap names in technology (FB, GOOG, MSFT, AMZN, NFLX), most big name companies are well off highs or even in bear markets. It is doubtful any incremental U.S. fiscal spending in 2016 will turn the economy around. Additional monetary stimulus from the EU probably won’t do anything meaningful either.

The pace of China easing may sway things and seems the biggest swing factor in 2016. But valuations are still in the 90 percent of historical P/Es, which doesn’t bode well for returns nor does tepid EPS growth overall for U.S. companies. However, for investors, it has paid to follow Federal Reserve policies in determining asset allocation over the past seven years, buying riskier beta equities in technology/biotechnology and short commodities. The recent rate rise has changed that somewhat as it signaled the Fed has pulled back from the easy money that fueled the asset bubbles the past decades.

Related: OPEC Members In Jeopardy, How Long Can They Hold Out?

Fundamental investing has morphed into guessing what central bank policies will be versus traditional investing, and 2016 won’t be any different. Thus I don’t expect commodity prices to recover as that does not appear to be what the Fed prefers. So 2016, at best, will be a low-return environment for equities as P/Es shrink due to Fed tightening, while commodity prices continue to trade below levels to support free cash flow for the energy sector.

This essentially amounts to a transfer for wealth from the commodity sector to the consumer. Going into an election year that tends to be typical of government as it panders for votes. At worst, the realities of a weakening economic backdrop could spell a deeper decline in equities, although that could remain an outside chance. Plus we have seen the spigot of wild fiscal spending from the $1.1 trillion budget bill that was recently passed, helping to support what little growth we have.

Related: Will Goldman Be Right After All?

Furthermore, whether the Fed is convinced QE hasn’t worked, is simply blind to weakening economic data, or chooses to use a rate cycle as a tool to convince markets the economy is improving, is irrelevant. The fact is that they have chosen a course of raising rates, one that is different from the past. This is why we are starting to see a change in asset price movement compared to the past.

What will be key are those policies that come with a new administration in 2017. A GOP win would probably be pro-growth with lower taxes and regulation, lower U.S. dollar that supports exports, and supportive of commodities, while a democratic victory could see a continuation of the current situation of a low growth environment tied to central bank policies that do not support commodities.

Related: Just About Every Part of the Permian Basin is Unprofitable at $30 Per Barrel

It is hard to say how it will shake out. The industrial and commodity names are at multiyear lows while technology/biotech have surged to record highs. These are two very different trajectories and looking forward, we don’t know whether the road ahead will continue along a course of asset price distortions, or a fork that will lead to different asset classes outperforming those that did over the last 7 years.

Without being able to predict the election outcome in 2016, it will be prudent to keep cash levels high in order to maintain flexibility. Furthermore with the leading beta asset classes starting to exhibit corrections, there are growing signs that the investing environment is changing, which should give investors pause.

By Leonard Brecken for Oilprice.com

More Top Reads From Oilprice.com:



Join the discussion | Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News