Friday, November 28, 2014

Energy Costs Plunge

The Organization of Petroleum Exporters (OPEC) met in Vienna over the Thanksgiving holiday. The decision out of that meeting was to leave their collective output of oil unchanged. Oil and energy opened today significantly lower.

A continuation of the decline in crude prices has the potential to significantly disrupt the production of shale oil in the U.S. and Canada. The higher cost producers will find it harder to be profitable, and after these recent years of low interest rates many are almost certainly overleveraged. Another example of a bubble created by low interest rates, and how they cause distortion?

So the producers of energy are lower this morning.  Gold and silver as well, but not so much as energy. My feeling remains that a prolonged period of low energy prices will counter-intuitively cause an increase in the velocity of money that will lead to the start of inflation, particularly as interest rates stay below zero real rate.

For the long term the inflation plays must be a buy.

After the shakeout in energy, perhaps in two or three years, oil will resume the rise.

Todays charts:

I am thankful this morning that I lightened up on my oil bets two days ago. I will watch how the remaining dogs react and act accordingly.
Watch the railroads. They have been dependent on shipping crude for the last couple years.

Control your risk,

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