Swan Song
Oil prices ended their worst month since the 2008 financial crisis after 3 events in a row knocked oil and other commodities for a loop. Those three events in order are Greece, Iran and China and while I guess you can't call them "black swan" events the timing of all three colliding at the same time led to the oil markets July swan song. Those same three issues are weighing on oil again as we start the new month so let us cover them in the same order that they impacted oil last month.
Greece was first. Greece by playing hard-ball with the EU and the IMF gained noting and hurting not only their economy but took a toll on the global economy as well. Today the reopening of the Greek stock market in Athens, after a 5-week closure, saw its market it crash's 23% before recovering while many stocks hit their daily downside limit. The expectations is for more selling and more turmoil in the days to come. That turmoil does not help oil demand expectations.
The other event that hurt oil was a possible deal with Iran to lift sanctions. Overnight Iran's oil Minister Bijan Namdar boosted that Iran's oil production could increase by 500,000 barrels per day in just one week after international sanctions are lifted. Then he says that they can raise production by 1 million barrels a day one month later. Most experts doubt these claims because of years of sanctions taking its toll on the Iranian oil fields but we know that Mr. Namdar boosts are getting larger. He also says that sanction on Iran's oil industry should be lifted by late November, showing once again that he is the king of optimism.
Yet perhaps the biggest reason why oil crashed was because of the slowdown in china. Even though China oil imports hover near record highs the slowdown talk is causing many to question whether that pace will continue. The AP reports that "two surveys showed Chinese manufacturing weakened in July. The Caixin purchasing managers' index, previously sponsored by HSBC, declined to a two-year low of 47.7 from June's 49.4 on a 100-point scale. Numbers below 50 indicate activity contracting. A separate index by a Chinese industry group, the Federation of Logistics & Purchasing, and the government statistics bureau declined to 50 from June's 50.2. The bigger decline in the Caixin index suggests weakness was concentrated in private and smaller companies, which make up a bigger share of the group surveyed for that report."
I guess we should mention strength in the dollar but the dollar is not a leading indicator on this but reflecting the risk aversion from the fore-mentioned events. Of course Fed policy may be behind some of that strength but if the Fed pauses because of the commodity crash it is more proof that the dollar is just acting as a safe haven away from global turmoil.
Oil also saw some pressure from a drop in rig counts but Dow Jones reports that while the rig count rose for the second consecutive week and third time in the last four weeks for some, like the analysts at Deutsche Bank (XETRA:DBKGn), this means that "U.S. producers are coming to the point where they start considering growth." However, Morgan Stanley (NYSE:MS) says investors should be cautious about assuming this represents the start of a material increase in the Rig count or much slower U.S. production declines. Lower cost vertical rigs are driving much of the increase but these rigs, as opposed to horizontal ones, generate only marginal production, the bank says."
The commodity crunch has hurt some major players. The Wall Street Journal reported that "Private-equity firm Carlyle Group (NASDAQ:CG) has split with the founders of its Vermillion commodity hedge-fund firm after its flagship fund shrank from $2 billion to less than $50 million in assets, according to people familiar with the matter. Vermillion Asset Management LLC's Viridian commodity fund, which traded in oil, metals and agricultural markets, has seen assets dwindle after heavy losses and a wave of investor redemptions, the people said. The fund lost 23% in 2014; the latest investor exits began in the spring and the fund reached a nadir in recent weeks."