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Mike Larson is off today. His column will return tomorrow. Mark Najarian, managing editor of Money and Markets, is filling in.
Down, Down, Down.
That seemed to be the theme this morning upon our return from the Thanksgiving holiday. The main declines came from oil prices, retail sales and energy stocks. But the news isn’t necessarily bad.
First, for oil: OPEC on Thanksgiving Day bowed to pressure from Saudi Arabia and maintained oil production at current levels, driving oil prices sharply lower last week before this afternoon’s rebound. That recovery might comfort some OPEC members who are pushing to reduce output to help support prices, which had fallen more than 30 percent before the meeting.
So have we hit the bottom, or can it reverse and go even lower? Politics and economics play key roles in the price of oil, of course. The Saudis want it to continue to drop, hoping that will help stymie development of shale production. Cheaply produced shale, particularly in the U.S. through the fracking process, will cut the reliance on OPEC oil. By keeping production high and prices low, it will make fracking less lucrative and slow its growth, they hope.
On the other hand, many oil-producing countries need the income from their oil industries and need higher prices. So there’s no guarantee the Saudi strategy will hold, as other producers will step up pressure on the Saudis to allow production cuts to support prices.
Here are two lists that help put oil prices in perspective.
First – the breakeven production point for various countries and regions, as reported by CNBC this morning:
–Saudi Arabia: Less than $10 a barrel.
–Russia: (onshore) $40-$60.
–Venezuela: Less than $30.
–North Dakota: (Bakken Shale) $40-$70.
–Texas (Permian): $40-$80.
–Texas (Eagle Ford) $40-$70.
–Alaska: Less than $40.
–Canada (Oil Sands): $50-$100.
But that’s not the entire story. The following chart shows what oil price a country actually needs to get a balanced budget for 2014, according to Deutsche Bank:
According to Mandeep Rai, editor of Top Stocks Under $10 and a keen observer of the oil sector, the drop in prices won’t immediately end U.S. production. Most domestic producers’ budgets have been set for next year. Wells are pumping and making money for companies, so they won’t be turned off suddenly. But the question is whether investment in new rigs will go forward or be curtailed.
Basically, we’re looking at a standoff. Who can handle lower prices longer: OPEC governments or U.S. companies?
“In the end, by keeping production at 30 million barrels/day, the Saudis were able to keep the pressure on U.S. output,” Rai said. “That will lead to a curbing of new U.S. production, but we will need a lot lower prices for a longer period before U.S. companies shut down existing production.”
|Will lower oil prices stymie growth in the fracking industry?|
How does that affect investors? “For (energy company) shareholders there will be stock-price pain in the interim,” Rai added. “However, in the medium to longer term, I think political ramifications in countries with growing deficits could put more pressure to support production cuts. My money is on continued development of the U.S. energy sector.”
Already there are some signs of that today, with the bounce-back in oil and gold prices and energy stocks, indicating that some of the panic selling might have been overdone.
Meanwhile, all the hype regarding Thanksgiving retail sales might have been overdone as well. In-store and online sales fell 11 percent to $50.9 billion, according to figures from the National Retail Federation. It seems the extended hours, with some big stores opening on Thanksgiving Day itself, actually diluted the effect of the traditional Black Friday start to the holiday buying season (see readers responses below). Online shopping failed to completely compensate for the lack of in-store buying.
The retail group said that some 133.7 million people shopped or planned to shop at stores or online over the four-day weekend, down 5.2 percent from last year. Shoppers spent an average of $380.95 over the four days, down 6.4 percent.
The take-away from all this? Look for fewer stores to open on Thanksgiving Day next year, and for Black Friday hours to move back to the more-traditional opening times.
What’s your take? Will falling oil prices be bad for the Western economies in the long run if it prevents the development of alternative energy sources? Here’s something that might not sound popular at first, but can we (should we) use the lower prices to boost our budget by raising gasoline taxes, which wouldn’t be felt as much now that gas is below $3 a gallon? Do you feel like you have more money to spend with the lower gas prices? Click here to add your viewpoint. There is also another worrisome issue related to the fall in oil prices — read Jon Markman’s morning column tomorrow for that story.
|Our Readers Speak|
Our column last week on the trend for opening stores on Thanksgiving Day and the extended hours over the weekend brought in a rush of responses, perhaps getting a better reaction than the holiday sales themselves, if the sales numbers are any indication.
The main view expressed by our readers appears to be that many of you didn’t plan to shop on Thanksgiving or Black Friday and were in fact against the extended hours, preferring to allow workers (and shoppers) to spend time at home with family. However, although most respondents opposed the store-openings, they mainly said it wasn’t for government to regulate the hours, as it does in some countries, but to allow market forces to set the course.
For instance, Reader Bob L said: “Let the free market decide store hours. There is no better system than the free market to tell you when to stay open if you’re a business. If your business decides to stay open and people don’t come to shop, then you will be changing your hours, won’t you?”
Reader Billy had a similar view: “I don’t ever remember myself or any member of our family ever shopping ON Thanksgiving and I don’t see that changing. It’s as though the business retail elite have really run right over this very important holiday….While I would still allow the stores the decision of whether to open or not..I would STRONGLY, STRONGLY recommend that people refrain from retail shopping on Thanksgiving and use that precious time to spend with family and friends and be thankful for what we have in this country.”
Myself? I avoided the stores over the holiday weekend. It wasn’t to make a political statement or even an economic decision. It was to avoid the mad-house shopping frenzy that I had expected. However, many reports are indicating that it was a calm opening to the holiday selling season. With the extended hours and prospects for bargains to continue through Christmas, many people no longer felt the need to rush out and scramble among the crowds to buy during the Thanksgiving break.
The matter is not settled, of course. There will be discussions about opening hours as Christmas nears. How did things go for you during the Thanksgiving break in regard to shopping (or not shopping)? Click here to join the conversation.
|Other Developments of the Day|
For the first time ever, Girl Scout cookies will be sold online. In the past, the organization has preferred the door-to-door selling method, believing that it helps teach valuable social and entrepreneurial skills to young scouts. Now, it says that there are important skills to be learned as well using technology. “(This) will also allow customers to help girls learn 21st-century skills grounded in technology, along with valuable interpersonal skills girls will acquire through their continued participation in traditional booth and door-to-door sales,” the organization said. Scouts will customize web pages, using their first names only, and email prospective customers with links to click on for orders. The websites will not be accessible without an email invitation, requiring the girls to build client lists. And personal information will be protected, for both the scouts and customers, using encryption in some cases.
Another thing taking a hit today is the ruble. Russian authorities recently allowed the ruble to float on currency markets, helping it to rebound after a severe decline linked to Western sanctions against the country and falling oil prices. But that bounce appears short-lived, and the currency has resumed its tumble. OPEC’s failure to cut production during its meeting last week caused oil prices to sink, hitting the ruble even further. Russia’s highly dependent on its oil resources, and the lower prices are pressuring the economy – leaving geopolitical observers to watch closely for President Vladimir Putin’s next move: Will it force him to scale back some of his regional ambitions? Or put him into a corner, forcing him into new, more aggressive actions?
The news wasn’t good out of Asia. Moody’s Investors Service downgraded Japan’s government debt rating, making things even more difficult as Prime Minister Shinzo Abe tries to reignite economic growth. Moody’s said “heightened uncertainty” related to its ability to cut its fiscal deficit after Abe last month delayed a national sales tax is a cause for concern. Meanwhile, China’s economy also disappointed, with the purchasing managers index out today coming in worse than expected. That immediately hit shares there. The Bank of China on Nov. 21 cut benchmark interest rates in an effort to spur the economy, and analysts said they expect more rate reductions to come.
Analysts will be watching closely tomorrow’s release of auto sales, with many expecting the highest November U.S. sales in more than 10 years. As many retailers were disappointed by Black Friday sales, automakers appear to have benefited from holiday promotions and the outlook for lower gasoline prices. Dealers likely sold between 1.27 million and 1.29 million new vehicles during the month, the best period since November 2001, according to The Wall Street Journal. Chrysler, the report said, is expected to be the big winner.
Remember — you can click here to comment on these or any other issues.
Until next time,