The price of oil has fallen to a new six-year low.
Casey readers know the story behind cheap oil prices in the US. New technologies have unlocked huge amounts of oil. US companies are now pumping more oil than they have since the 1970s. US oil production has doubled in the past decade.
The price of oil has fallen from $106 per barrel in June 2014 to $42 today. In May and June, oil rebounded above $60, giving some hope that the bottom was in. But this latest washout to new lows suggests that oil will be cheap for at least the next couple of months.
Bloomberg reports that the International Energy Agency (IEA) thinks the “supply overhang” could last at least another year.
The global oversupply will average 1.4 million barrels a day in the second half of this year, straining available storage capacity, before easing to about 850,000 barrels a day in 2016, the IEA estimated. The production surplus in the second quarter was 3 million barrels a day, the highest in 17 years, it said.
• The oil crash is slamming companies in the industry…
We’ve shown you how big oil companies are hurting. America’s two largest oil companies, Chevron (CVX) and Exxon (XOM), both reported their weakest profits in 13 years. XOP, an exchange-traded fund (or ETF) that holds the largest oil companies, is down 57% from its June 2014 peak.
We’ve also shown you how the “picks and shovels” of the oil industry, like Halliburton (HAL) and Schlumberger (SLB), are struggling. OIH, an ETF that owns “pick and shovel” companies, is down 44% since last June.
• The oil crash is also hurting entire countries that rely on oil revenue…
Norway is one big oil producer that’s hurting. Norway produces more oil than any other country in Europe, thanks to its vast oil reserves in the North Sea. Petroleum and natural gas account for 62% of Norway’s exports.
Crashing oil prices have pushed Norway’s unemployment rate to an 11-year high. And Norway’s currency, the krone, has dropped 25% in the last year.
Norway’s problems are important because it runs the biggest sovereign wealth fund on the planet.
You see, Norway was smart with its oil profits. With oil around $100/bbl for much of the last four years, Norway made a lot of oil money. It socked much of those profits away into its government pension fund. It’s now the largest pension fund in the world, with nearly $900 billion in investments.
Norway’s pension fund is a gigantic investor. It owns an incredible 1% of all stocks worldwide.
• The oil crash could force Norway to sell some of its stocks…
Bloomberg explains how Norway may have to make some tough choices:
If the government has to withdraw money from its $875 billion sovereign wealth fund, it will be a historic step. It’s either that, or heavily rein in fiscal spending at a time when the country needs it most. The state’s spending could start to outstrip income from oil, which it pours into its wealth fund for future generations.
If Norway does start selling its stocks, it could put pressure on stock prices worldwide. European stocks would probably feel it the most. Norway’s pension fund is the single largest owner of European stocks, owning 2% of all European stocks.
• Marc Faber thinks the oil crash could force other government funds to sell…
Faber is the managing director of Marc Faber Limited, an investment advisor and fund manager. You may know him as “Dr. Doom.” He earned that nickname by making several huge contrarian calls throughout his career. He urged his clients to get out before Black Monday hit in 1987. And he predicted the Asian financial crisis of 1997-1998.
In a recent Barron’s Roundtable, Faber said that the collapse in energy prices could cause sovereign funds around the world to sell:
…sovereign wealth funds rose to $6.8 trillion as of September 2014, from $3.2 trillion in 2007. Of that growth, 59% came from oil, gas, and related revenue. As oil prices fall, what will happen to the growth of sovereign wealth funds, which have been buying financial assets around the world? Their funding is going to evaporate, and they might be forced to sell.
Faber has been making bold calls his entire career. He’ll be sharing his thoughts with Casey readers at the 2015 Casey Research Summit. Doug Casey, James Altucher, and Gerald Celente will also be there, among other investing all-stars.
The summit is from October 16-18 at the 5-star Loews Ventana Canyon Resort in Tucson, Arizona.
Click here for more information on the 2015 Casey Research Summit.
• At least one industry is benefiting from too much oil…
There’s a boom happening in oil shipping.
Oil shipping companies move oil from one country to another. They make money based on the volume of oil they move…so they don’t need high oil prices to earn high profits. Unlike big oil companies, oil shippers are making a lot of money with oil at $42/barrel.
Nordic American Tankers (NAT) is one of those companies. It owns a fleet of 24 ships that it uses to move oil across oceans.
Nordic just released great second-quarter results. Profits jumped 84% from last year, and it raised its dividend from $0.12 to $0.40. Nordic’s stock price is up 50% this year.
E.B. Tucker, editor of The Casey Report, is bullish on oil shipping stocks. In the newest issue of The Casey Report (published yesterday), he explained how the oil shipping industry is in a “sweet spot” right now.
Basically, the world has plenty of oil…but much of it is in the wrong places. Countries that have lots of oil don’t need it all…and countries that need oil don’t have enough. For example, China consumes 3.8 billion barrels of oil per year. But it produces only 1.7 billion barrels per year.
Oil shipping companies’ stocks are booming because it’s their job to get oil to those who need it.
E.B. likes one dominant oil shipper in particular. He expects it to raise its dividend by next week:
The company will announce its second dividend payment for the year on August 20. It has an explicit policy of paying 80% of annual net earnings to shareholders. The first dividend payment this year was $0.25 per share. Earnings were higher in the second quarter. We expect the dividend to be, too. We want to buy in before that happens.
The tanker business has been strong. But the collapse in oil prices has overshadowed it. We have a unique opportunity to buy shares of the best-positioned crude tanker operating right before it announces its next cash payout.
You can invest in this oil shipper with us by taking a risk-free trial of The Casey Report.
Chart of the Day
Today’s chart shows the huge growth in world oil production.
You may think that low oil prices should cause a decline in production. After all, the laws of supply and demand say that “the cure for low prices is low prices.”
But here’s something you might not know: once an oil well starts producing oil, there’s no easy way to turn it off. Oil companies have spent hundreds of billions of dollars unlocking new sources of oil. Now that the oil is flowing, most of it will keep flowing no matter how low oil prices get.
As you can see, global oil production is at its highest level in at least 25 years…and shows no sign of slowing down.
Delray Beach, Florida
August 14, 2015