The Oil Price Continues its Free Fall

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I’ll be honest with you. On days like this, I don’t feel like writing the Daily Reckoning. I went to bed last night hoping to wake up to hear about a peaceful, although traumatic, end to the café siege in Sydney. Instead, two innocent young people lost their lives.

And for what?

Tragedies happen on a daily basis, I know. Yet it’s not often you see one unfolding before you in real time. It makes it that much more real…it punches you in the gut and grabs hold of your heart.

Everyone, at some point, pops into a café to grab a coffee. If you work in the city, chances are it’s something you do every day. It’s a mundane and innocent act. That people died because of it makes it so much more shocking.

So our hearts and thoughts go out to the friends and families of those killed in the siege, and to those who escaped.

As pathetic and useless as this seems right now, let me make one comment. We all say the best way to fight terrorism is to not let it affect us. ‘It won’t change the way we live’ etc. If that’s really the case, let’s live it then.

Go into a café and buy a coffee, don’t get freaked out by Middle Eastern looking men with beards, don’t succumb to fear, terror, racism and stereotypes. Don’t turn on your fellow man (or women).

I’m not sure we passed that test yesterday. There were rumours throughout the day that authorities had shut down airspace over Sydney (false) that Sydney Harbour Bridge had closed (false) and that various other incidents in the city were terrorist related. Fear took hold.

And then there were the politicians sending out waves of fear-laced language throughout the day.

If our slogan is not to let the terrorists win, don’t make it an empty one. Reject fear, embrace love, and live life. It’s the only way to ‘win’.

Now back to our beat — money — as insignificant and grubby as that sounds on a day like today.

The oil price free-fall continues. It tried to rally yesterday, and in local trade some ‘bargain-hunters’ come into the market and pushed up energy stocks. But overnight the selling hit again. Brent crude fell 2.25% and West Texas crude slumped 4.3%.

The Financial Times reports that up to $US1 trillion worth of investment is at risk due to the price falls. The good news, if only from a long term perspective, is that this will restrict future supply and push up prices again.

But that’s a longer term consideration. For now, the price is in free-fall, as shown by the weekly chart of Brent crude below:

That is a collapse only beaten by the 2007/08 speculative run-up and implosion. Where does it end?

I asked Quant Trader Jason McIntosh for a technical take on the panic. Here’s what he told me:

Brent is clearly in a free-fall. Support levels mean little at times like these. The market has a tendency to slice straight through them.
 
Don’t think about trying to buy a bargain at these levels. It’s a case of just keeping out of the way. No one knows how much further this trend will go.
 
If you’re short…well done. Hold on tight and enjoy the ride. 

It’s all looking a bit like GFC MKII, without the banking panic. Kris Sayce, publisher of the Daily Reckoning and editor of the Tactical Wealth newsletter, has been talking about the market hitting another tipping point recently. He has some ideas about how to capitalise on it, following on from his successful trades placed during the last major tipping point, GFC MKI. Click here to listen to Saycey’s presentation.

If this is another tipping point, this time the pressure is firmly on commodity markets and commodity producing countries, not the banks. Russia is a case-in-point.

Yesterday, I talked about capital flight, falling currencies and the need to raise interest rates to protect the currency and ward off inflation. Russia, the world’s largest energy producer, is living that nightmare.

From Bloomberg:

Russia’s central bank raised its benchmark interest rate the most since the nation’s 1998 default, making the announcement in the middle of the night in Moscow as policy makers seek to douse investor panic and stem a ruble rout.

The central bank increased the key rate to 17 percent from 10.5 percent effective today, it said in a statement on its website. Policy makers gathered for an unscheduled meeting after a one-point increase on Dec. 11.

Wow…that’s an interest rate hike. The Russian ruble is down 50% against the greenback this year, as capital drains out of the economy. This causes the cost of imports to skyrocket for Russian businesses and households. In response, the central bank must increase interest rates to entice capital back in and halt the inflationary surge.

But the cost of doing so is a severe constraining of credit and a recession. The central bank warned that GDP would contract by nearly 5% next year if oil prices remained around the US$60 a barrel mark.

It’s going to be a nasty winter in Russia…

Is this a fate that awaits Australia? As I mentioned yesterday, it’s a low probability event. But the government needs to start moving on the issue of reform so that Australia maintains credibility in the eyes of foreign investors.

Household debt is near record high levels. Government debt is relatively healthy but it can’t go too much higher (as a percentage of GDP) if we wish to keep our coveted AAA credit rating. It’s this rating that gives high household debt a cloak of respectability. That’s because the banks hold most of the household debt on their balance sheets, and the AAA rating implicitly backs the banks. It’s the one thing holding up this house of cards economy.

But the government’s budget has structural problems. That is, falling revenue and rising spending commitments. Within five years, the situation could get ugly without comprehensive reform.

Joe Hockey’s budget update was both nasty (as expected) and delusional. Treasury expects real GDP growth to return to trend levels of 3% by 2015/16 and then increase from there. On what basis? More hope…a rebounding China?

On both sides of politics, dear reader, we have numpties in charge. If they keep their head in the sand, we’ll end up resembling Russia much more, and much sooner than anyone ever expected. A reckoning is heading Australia’s way.

Greg Canavan,
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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scottoftheantipodes
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Of course the politicians were “sending out waves of fear-laced language”, they want you to be scared. This is how they facilitate more control, and thus more security (for themselves).

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