Investors were blessed with another strong month as the S&P 500 was up 2 ½% in November. Interest rates appear to have shrugged off any ill-effects from the termination of QE. For the most part, November was a fairly peaceful month.
The one area that saw the biggest change was the energy sector. Oil prices had been dropping as the US has continued to increase production from its shale resources. A supply glut seems to be forming, so there was speculation that some of the OPEC constituents would elect to decrease their output to help stabilize oil prices. On November 27th, OPEC met and decided to continue to produce 30 Million barrels per day(1). This news caused oil prices to drop an additional 12% in one day. Oil had been as high as $107 per barrel this past summer, but at the time of this writing currently sits in the mid-60s(2). Most energy companies were hurt by the news and, according to Reuters, the energy sector lost over 6% on November 28th alone(3).
We celebrated our annual client appreciation banquet on November 18th and also held our market review presentation during that afternoon. In the review, we highlighted the benefits from the huge increase in domestic oil production. The increase in oil infrastructure over the past few years (primarily from shale) has increased the global supply of oil, created jobs domestically, and reduced our reliance on foreign oil. Now with oil dropping so quickly, will the oil boom continue?
Below is a chart that illustrates just how much it costs to get oil in its various states. To little surprise, the Middle East countries have the easiest and cheapest access to oil and the Arctic region is the most cost prohibitive area. The real take away from the chart is that oil would need to drop (and stay) in the low 50s before global supplies would be materially impacted. Even at that level, the North American shale basins still have some areas that would remain competitive. My conclusion is that I don’t see our oil production slowing down in the near future.
A shift to natural gas and alternative energies still needs to be the longer term solution. For now, we will just have to be satisfied with gas below $3/gallon, which should help corporations and consumers alike in making the rest of 2014 a joyous one. Enjoy the holidays and let us hope 2015 brings us more to be happy about!
(2) WTI Crude Oil Source: EIA.gov
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