Canada just closed another horrible week…
Yesterday, the Canadian dollar hit a fresh 11-year low. It has now lost 16% of its value against the U.S. dollar this year.
Crashing oil prices have obliterated Canada’s currency. The price of oil has plunged 66% since peaking in June 2014…and 22% since the beginning of November. It’s now at its lowest level since February 2009.
Canada is the world’s fifth-biggest oil-producing country. Oil is, by far, Canada’s most important export, making up 18% of its total exports.
• Canada’s oil industry has lost 36,000 jobs since last summer…
More job cuts are likely coming…
The Canadian drilling association expects drilling activity to be 58% lower next year than it was in 2014.
In October, The Conference Board of Canada said it expects revenues for Canada’s energy sector to fall 22% this year. It also expects the industry to lose about C$2.1 billion ($1.5 billion) in 2015. Last year, Canada’s energy industry made a C$6 billion profit.
• The world has too much oil…
Global oil production hit an all-time high last year. U.S. oil production has jumped 90% since 2008, to a thirty-year high. New technologies like shale drilling have made it possible to access vast areas of oil that used to be inaccessible. The U.S. now produces more oil than any other country.
U.S. oil stockpiles are overflowing. According to the U.S. Energy Information Agency, U.S oil inventories hit a record high of 1.31 billion barrels last week.
• Low oil prices have crushed U.S. oil companies…
The XOP ETF, which tracks large U.S. oil producers, has dropped 64% since oil peaked in June 2014. Exxon Mobil (XOM), the largest U.S. oil company, has dropped 24% in the same period.
Shares of oil services companies, which sell “picks and shovels” to the oil industry, have also crashed. The Market Vectors Oil Services ETF (OIH), which holds 26 oil services companies, has lost 52% since last June.
• On Wednesday, U.S. Congress lifted a 40-year-old ban on oil exports…
The ban had been in place since the 1973 oil embargo. When the U.S. government instituted the ban, oil shortages were the norm. Not anymore. The U.S. now has far more oil than it needs…
Policymakers hope lifting the ban will help the oil industry work through its massive oil surplus. However, it’s unclear if lifting the ban will actually help. The U.S. isn’t the only major country with too much oil…
According to the International Energy Agency, oil stockpiles in all developed countries hit a record high of almost 3 billion barrels in September.
Eventually, this cycle will end with absurdly low prices for oil stocks. We’ll get an amazing opportunity to buy oil stocks at fire sale prices. But for now, the trend is still down.
• Switching gears, industrial giant 3M (MMM) says the economy is in bad shape…
3M has customers in practically every industry and 70 different countries. It sells everything from sandpaper to bandages to power cables. As 3M goes, so goes the global economy.
Judging by 3M’s sales, the global economy is weak. Revenues have dropped three quarters in a row. Last quarter, they fell 5.2%. And management doesn’t expect sales to pick up anytime soon…
On Tuesday, 3M said it expects its sales to grow just 1% this year, down from 1.8%. It was the second time in two months that the company cut its sales estimates. In October, 3M cut its annual sales forecast from 3.3% to 1.8%. That same day, it laid off 1,500 workers.
3M’s shares fell 6.5% on Tuesday. It was the stock’s worst day since October 2011. 3M’s share price is now down 9% this year.
• U.S. industrial production shrunk for the third straight month in November…
Industrial production, which measures the output of U.S. factories, fell 0.6% between October and November. The drop was the largest since March 2012. It was also far worse than the 0.2% decline economists were expecting. The economy produced fewer cars, appliances, and electrical equipment in November than it did in October.
• This is the latest sign of the “industrial recession” in the U.S…
By now, regular Dispatch readers know that U.S. industrial companies are struggling. Major manufacturers have been losing sales and cutting jobs for the last several months. Equipment manufacturer Caterpillar (CAT), diesel engine maker Cummins (CMI), and industrial conglomerate 3M Co. (MMM) have all recently cut sales estimates for next year. All three companies have also laid off thousands of workers.
Last month, the Institute for Supply Management's manufacturing index fell to its lowest level since the Great Recession. According to this key index, U.S. manufacturing is now shrinking for the first time in three years.
• Raoul Pal puts the odds of a global recession at 65%…
Pal is one of the world’s top “big picture” investors. He has a knack for getting major calls right.
For example, in November 2014, Pal predicted the price of oil would fall to $30 or $40 per barrel. It sounded crazy at the time… oil was at $77 a barrel. But he was dead-on. Yesterday, oil closed at $35.74.
And last December, Pal predicted that the U.S. dollar would rally. The dollar hit a 12-year high earlier this month.
Pal’s latest call is that we’re headed for a recession. Based on the ugly manufacturing data, he thinks there’s a two-in-three chance that we enter a recession soon.
Like Pal, we think a major economic downturn is just around the corner. We put together a short, free video with strategies for how to position yourself ahead of the coming storm. Click here to watch.
Chart of the Day
The price of natural gas is in free fall…
Today’s chart shows the price of natural gas going back to 1999.
Yesterday, the price of natural gas dropped 4.9% to its lowest level since March 1999. It’s now fallen 22% since the beginning of December. It’s down 40% on the year.
Natural gas has crashed for the same reason oil crashed: there’s too much of it. Yesterday, The Wall Street Journal reported that natural gas stockpiles are at an all-time high.
Delray Beach, Florida
December 18, 2015
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