There is chaos in the energy patch since the Energy Information Administration confirmed that crude oil inventories rose by a whopping 19 million barrels in the latest week – the largest weekly surge ever recorded. As I mentioned on my Wednesday podcast, the world used to use approximately 100 million barrels of crude oil per day, but now with worldwide demand down approximately 30%, we use barely 70 million barrels of crude oil per day. As a result, the OPEC+ nations’ (which include Mexico & Russia) cut of 9.7 million barrels per day is grossly insufficient. Even if Canada, the U.S., and other non-OPEC+ countries cut crude oil production by 10 million barrels per day, that would still be insufficient, so the crude oil glut continues to grow. As a result, crude oil prices cracked the $20 per barrel level Wednesday and closed just above $18 per barrel on Friday – even though some energy stock prices rose on Friday.
Crude oil exemplifies the major financial and economic problem facing the world today, and that is deflation. Despite quantitative easing plans by all major central banks, and the recent multi-trillion-dollar bailout packages, nearly all commodity prices (except perhaps gold) are falling. It’s not just oil, but other energy sources, the industrial metals, and agricultural commodities. The overall CRB commodity index is down 37% year-to-date, falling from 196.64 at the end of 2019 to just 123.80 last Friday.
Crude oil began the year at $61.21 per barrel, so it is down 70% in just over three months. Crude oil at $18 per barrel is not healthy, and there is talk that the Trump Administration may pay drillers to keep crude oil in the ground. In the meantime, the price of corn, chickens, and other commodities remains soft. Luxury real estate, vehicles, and collectibles are all soft and should not be sold until growth returns.
It is absolutely imperative that the Federal Reserve and other central banks strive to stimulate economic growth, since if deflationary forces persist, it would be a long-term disaster for central bankers, since consumers would likely postpone their purchases if they assumed prices would continue to decline. A good example is real estate in New York City and Long Island, which was soft before the coronavirus outbreak and will likely turn weaker, since it is going to take a while for life to get back to normal.
Thanks to ultralow interest rates, as well as quantitative easing, the Fed will try to stimulate multiple industries, like the automotive and housing markets, which are notorious for being interest rate sensitive.
I must add that I remain impressed how the Fed continues to control Treasury bond yields, which declined last week while the stock market improved. The lower the 10-year Treasury bond yield, the stronger the foundation under the stock market. The demand for both high-yield corporate bonds and high-dividend yielding stocks remained robust last week, which is a good sign that investors are expecting economic growth to reaccelerate as many states prepare to reopen their respective economies sometime in May!
The good news is that Europe continues to gradually reopen as other countries follow Austria, the Czech Republic, Demark, and Norway. On Wednesday, Germany announced that it will reopen its economy this week. Volkswagen announced that it would begin reopening its first German factories on Monday, April 20th, while its plants in Bratislava, Slovakia, Portugal, Spain, Russia, and the U.S. would resume operations on April 27th. Interestingly, 40% of Volkswagen’s annual sales are attributable to its China factories, which resumed operations in February and are now operating at 60% of capacity.
As I mentioned in my Wednesday podcast, in the U.S. we are fortunate to be able to watch Europe re-open before the U.S. fully reopens, so we can see if there are any negative repercussions there. Also, since the U.S. is not as densely populated as Europe, most of us can space ourselves out a bit better.
Navellier & Associates does not own Volkswagen in managed accounts and a sub-advised mutual fund. Louis Navellier and his family do not own Volkswagen privately.
The Bad Economic News Keeps Coming…
The economic news last week was mostly negative, as expected. On Wednesday, the Commerce Department announced that retail sales declined 8.7% in March due largely to a 25.59% decline in vehicle sales and a 17.15% decline at gas stations, but that was a factor of lower gasoline prices. At the same time, there were many “green shoots” in the sub-categories: Sales rose 25.58% at food and beverage stores (the best since 1992), +6.4% at general merchandise stores (best since 1992), +4.27% at health and personal care stores (second highest month ever recorded), +3.11% in on-line stores, and +1.35% at home improvement and building material stores. Excluding vehicles and gas stations, March retail sales only declined 3.1%, which was substantially better than economists’ consensus estimate of a 5.2% decline.
On Thursday, new unemployment claims rose by 5.25 million for the latest week, which is down from the previous two weeks of over six million each week. Nonetheless, the real unemployment rate may be as high as 15%, so the urgency to reopen the U.S. economy remains crucial. On Thursday, the Small Business Administration (SBA) announced that it ran out of money for its emergency loans. Specifically, the SBA stated that “The SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding.” Naturally, the pressure for Congress to increase SBA funding will intensify, otherwise new claims for unemployment could potentially reaccelerate.