4 Reasons Why Oil Demand is Still Weak

crude oil

According to my economics professor, as the price of a product decreases then the quantity demanded increases. In theory, the demand for oil should increase since the price of crude oil has dropped by 50 percent over the past year.

“There is always a flaw in the system!” (Beetee from the movie Catching Fire / Hunger Games)

Cruel oil is primarily refined into a variety of fuels as shown by the chart below:

Usesofpetroleum

Reason # 1 – Fuel Efficiency

Planes, trains and automobiles are much more fuel-efficient today than ever before. For example: Jet aircraft efficiency is improving, between 1960 and 2000 there was a 55% overall fuel efficiency gain based on the Boeing 707 model. Moving freight by train is about 3 times more fuel-efficient than doing so by highway. Are you old enough to remember “muscle cars” that used to get 10 miles per gallon. Today those same cars get over 30 mpg.

rail  train

Reason # 2 – Fuel Taxes

If you are Canadian, have you ever wonder why the price of gasoline was always cheaper in the United States compared to filling up in Canada? Consider that Canada has an overabundance of oil and 99% of our oil exports goes to the U.S. The missing component is gasoline taxes in Canada are about $0.72  a gallon higher than the United States. See how U.S. gasoline taxes compare to some other countries;

Country Tax Per Gallon
United States $0.53
Average Euro Zone $2.62
Australia $1.40
Canada $1.25
Chile $1.93
Iceland $1.97
Ireland $2.95
Japan $2.16
United Kingdom $3.44

 

Reason # 3 – Currency Exchange Rates

Crude oil is priced in U.S. dollars so price movements in the foreign exchange markets can have an impact on the price of fuels. For example; in August of 2014 when cruel oil was at $90, I would have paid $1.09 Canadian for $1 U.S dollar and now it will cost me $1.31 or 20% more. In simple terms the price of gasoline in Canada is 20% more expensive than in the United States based just on exchange rates. The same holds true for Europe since the exchange rate for the Euro has gone down from $1.31 in Aug. 2014 to $1.11 U.S., a drop of 15% in value in just one year. There are of course other factors in fuel pricing  so these numbers are not exact by any means.

Reason # 4 – Increased Spending on Public Transportation 

The use of public transportation is growing leaps and bounds. I was in London, England 20 years ago. I was amazed that I could get off a plane, jump on a train and arrive at my hotel. Toronto has the busiest airport in Canada and train service from the airport to downtown was just established this year. Other major cities in North America are jumping on the band wagon and constructing more rapid public transportation systems.

(Bloomberg) — China is investing more than 800 billion yuan ($128 billion) in domestic railway construction in 2015, the same as last year’s final target, while pledging to increase its railway makers’ overseas market share.

In reality, oil prices, in other countries are not as low as investors think. The demand for oil will still be weak because prices haven’t dropped that much outside of the United States. However, the biggest consumer of crude oil is still the United States, followed by China, Japan, India and Russia. The U.S. consumer should benefit the most from the current price of oil.

OPEC has realized that the demand for oil will not increase enough to reduce the oil glut in world markets.

OPEC forecasts oil prices will grow by no more than $5 per barrel a year to reach $80 by 2020, with rival non-OPEC production growth slowing but not fast enough to fully clear the current oil glut, according to OPEC sources.

Add slower than normal economic growth around the world to the equation and the price for oil will stay relatively weak for quite a long time.

 

 

 

To Hike or Not To Hike – That Is the Question Facing the Fed

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I can’t remember a time when there was such serious disagreement over what the Federal Reserve should do regarding a rate hike. I have been reading several articles written by analysts and economists in the past few months and I must confess to being confused by the divided opinions.

Part of my confusion is caused by the fact that the Fed keeps reiterating that they are “data-dependent” therefore the focus on every little bit of data, no matter how trivial is being dissected. For example: The August’s employment report was viewed by some Wall Street analysts as lackluster.

The U.S. government’s August employment report, showed non-farm job growth of 173,000, a number lower than expectations of 200,000. The jobless rate was rosier than forecast, however, falling to 5.1 percent—the lowest since April 2008. Average hourly wages rose a greater than expected 0.3 percent. The July payrolls were revised higher to 245,000.

Now employment numbers are often revised, especially July & August because close to 30% of survey participants are often on holidays. On average, August employment numbers have been revised up 66,000 each year! I expect the actual employment numbers will be in the range of 235,000 new jobs being created which is much better than expected. July saw another 30,000 jobs added and June saw another 14,000!

There are those who argue that while unemployment did drop to 5.1%, that is a “soft” unemployment figure. The participation rate is down. The number of part-time workers wanting full-time jobs is still high and the new employment trend is not that encouraging. Plus the Fed has a dual mandate to promote full employment and stable prices. They have a 2% inflation target which is not even close to being achieved for a while because of low oil prices and a strong U.S. dollar.

Why raise rates when the economy is barely getting back to a stable 3% growth rate compared to the old 4% to 5% range. Raising interest rates could further strengthen the U.S. dollar putting downward pressure on the export market and hurt the recovery in the housing market.

Those who think we should raise rates likewise have an array of data to support their case. GDP grew 3.7% in the second quarter. If you take out the weather-related first-quarter 2015 GDP figure, GDP growth is running well over 3%. Given the global headwinds currently buffeting economies, that’s about as good as it’s going to get. This economy has weathered tax increases and the abrupt changes of Obamacare, as well as a significant drop in capital spending related to oil production and has “kept on ticking.”

“If there is a recession in our near future, as David Rosenberg points out, it would be the first recession ever that did not see consumer spending or employment go down for the count.”

Keep in mind, in the history of the United States, they have never had a period longer than nine years without a recession. This relatively weak recovery is getting long in the tooth. Do you want the Fed to confront the next recession with another round of massive quantitative easing as the only policy tool left in their tool box? When their own research shows that Q.E. wasn’t very useful! We can clearly see the distortions caused by Q.E. in both the stock & bond markets around the world.

What do you need in order to begin to increase interest rates? Inflation is under control and according to most Fed economists seems to be ticking higher. Unemployment is moving lower. The economy is doing quite well. If not now, when? How much better do you want things to get before rates are taken back to something close to normal?

I would not argue for a rapid rate hike. In fact, I would prefer 1/8 of a point at every other meeting, rather than the typical quarter point. A gradual tightening cycle, perhaps getting to 1% by the end of 2016 and 2% by 2017, makes a lot of sense to me.

rock

However, the U.S. financial markets are exhibiting the classic behavior patterns of an addict.  Just a hint that the Fed may start slowing raising rates has already caused the financial markets to throw an epic temper tantrum! The same thing happened under the leadership of Ben Bernanke when he announced the ending of the Quantitative Easing program!

What do you think the Federal Reserve should do? Postpone or raise interest rates?

Why I Quit Being a Financial Advisor

planner

It is times like these that I am so glad that I quit being a financial advisor. Never in a million years, did I believe that  investors would see negative interest rates. Diversification is less effective in protecting your investment portfolio. Sometimes stock markets all over the world will fall in value at the same time. I really don’t miss the phone calls that I would be getting from clients every time there is a correction.  “Sorry, Mr. Client but I can’t make the stock markets go up for you.” (Hand holding isn’t my strongest suit)

One of the most frustrating part of the job was setting up achievable financial plans that were simply ignored. It is maddening when you put a plan together for a client to pay down the mortgage and come back a year later to find out that the client just booked a Caribbean cruise for the whole family. “Sorry, Mr. Client but that wasn’t in the plan.”

Some people just can’t be sold on putting a budget together, having a financial plan and investing their savings. They would rather spend time keeping track of standings and game scores of their favourite sport teams than tracking their monthly expenses.

The main reason for quitting is 80% of mutual fund managers don’t beat their benchmark index. Low cost index funds and exchange traded funds are more readily available today for investors to construct their own investment portfolio. Plus the internet has all kinds of free financial information. Investors have access to the same technology that financial advisors use to deliver services to their clients.

Lastly, asset allocation doesn’t work in this low-interest rate environment. Allocating some money into a fix income product will produce negative returns for clients. Bond mutual funds & bond ETF’s will lose money when you factor in the cost of  fees, taxes and inflation.  So basically, the mutual fund company and your advisor will get paid to lose  money.

Do you need to  pay an advisor $2,000 to $5,000 a year for peace of mind?

  • Do you need someone to reassure you during market corrections to stay on course?
  • Someone to remind you regarding deadlines (retirement contributions, education plans)?
  • To review and help make adjustments to your financial plan?
  • To assist in evaluating the financial pros & cons to major life changing decisions?
  • To help you understand complex financial investments?
  • Do you lack the discipline to do it yourself or just don’t have the time?

In my humble opinion, over the long-term, paying for peace of mind can be very expensive. No one will care more about your money than you. I recommend paying for legal advice for wills & estate planning or tax advice from an accountant.  However, buyer beware, just because an advisor has passed the required number of courses doesn’t make them a good advisor.

scam-financial-advisor

Disclaimer: I have a very bias opinion on paying for investment advice, there are some very good advisors but there are also some bad!

 

Avoid Oil, Wait for the Fed Before You Buy

Cycle-of-Market-Emotions-EngV1

Oil prices have become completely disconnected from fundamentals, demand has never been stronger this summer, yet oil prices plummeted. If crude oil prices can fall 40 percent when demand is at its strongest, what’s going to happen when demand falls to this weakest part of the year? Plus, North American oil refineries will be closing in the fall for some overdue maintenance which will increase oil inventories and put more downward pressure on prices.

Saudi Arabia gave oil traders some hope last week, saying that they are open to talking about cuts in production. OPEC talking about cuts and actually making cuts are quite different. Setting quotes among members in the past has been the easy part but stopping OPEC members from cheating has been impossible. Non members, like Russia also have to agree to quotes and there is nothing stopping American frackers from increasing production.

I am still avoiding the oil patch. For more information as to why, here are two of my older posts that you should consider reading.

Warren Buffett Dumps US$3.7 Billion Exxon Mobil Stake

Is $70 Oil Still in the Cards? Think Again!

The Fed can crash Wall Street

The Fed has done a good job on reducing unemployment and keeping inflation in check. The government last week revised second-quarter gross domestic product to show GDP expanding at a 3.7 percent annual pace instead of the 2.3 percent rate it had initially estimated.

U.S. non-farm productivity increased at its strongest pace in 1-1/2 years in the second quarter, keeping wage inflation subdued for now. The Labor Department on Wednesday revised productivity to show it rising at a 3.3 percent annual rate, the quickest since the fourth quarter of 2013, instead of the 1.3 percent pace reported last month.

However, history has shown us that September & October have been unkind for stock market returns. Add a possible rate hike to the mix and this temporary sell-off in the stock market will continue.

“In the 11 times since World War II that the market fell by 5% or more in August, it continued to fall in September 80% of the time, and did so an average of 4%,” said Sam Stovall, U.S. equity strategist at S&P Capital IQ.

The so-called “smart people” on Wall Street are actually dumb, they continue to make a big fuss over ONE small rate hike.  The Fed is smart enough to know that increasing interest rates will not only dampen economic growth in America but effect WORLD economic growth. The Fed has proven to be dovish, time and time again, no need to panic that the Fed will rapidly increase interest rates.

A big sell off of the Russell 2000 (IWM) is a perfect example on how dumb Wall Street is!  U.S. companies listed on the Russell 2000 sell their products and services within the U.S. domestic market. They don’t care about a slowdown in China or world economic growth. They only care about economic growth in America!

iwm

During my 30 years of investing, I have seen many so-called “stock market experts” come and go. Forget all the noise, I believe that U.S. stocks are still a good bet.