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Crude Oil, Treasury Yields Fall, Equities Sink

Posted by Joseph Trevisani on Jan 12, 2015 12:35:00 PM

Crude oil dropped to its lowest level in more than five and a half years and the yield on the 10 year Treasury dipped below 2 percent for the fifth straight day as investors sought the safety of U.S. debt

West Texas Intermediate fell as low as $45.90, 5.1 percent below its close on Friday and its weakest quote since April 21st 2009. Brent skidded to $47.18, 5.9 percent down from its $50.11 close last week and the lowest since March 2009.

The yield on this benchmark 10 year Treasury slipped two basis points to 1.93 percent in New York trading.

The Dow was off 52 points to 17,684 and the S&P had shed 13 pints to 2,031 at 12:35 pm though both had opened at a gain. 

The return on the 10-year bond, which is used to set many commercial interest rates, has fallen steadily since reaching 3.05 percent last January. This decline has surprised many analysts as it came about despite the Federal Reserve ending tits quantitative easing purchases in October.

A steep drop in government yields in Europe as the ECB contemplates its own quantitative easing program, has likely brought buyers into U.S. Treasury markets, supporting prices and lowering yields. The equivalent German 10-year Bund is paying 0.48 percent.

The immediate cause for today’s oil decline was reduced price forecasts from Goldman Sachs Group Inc. and Societie Gernerale SA but oil has been in rapid decline since last summer.

Burgeoning concerns about the strength of the European, Chinese and Japanese economies have combined with a supply glut stemming from North American shale oil production and a rising dollar to produce the steepest decline in prices since the financial crisis in 2008.

Oil, like most international commodities is priced in U.S. Dollars, and when the value of the currency rises commodity prices fall as each dollar buys more of a fixed item

The price of a barrel of WTI, the U.S. standard has plunged 57 percent since it June 2013 high of $107.73, Brent, the European and international standard has lost 59 percent after the June high of $115.71. 

Goldman predicted that WTI will trade to $41 and Brent to $42 within a quarter. Its analysts also expect inventories to increase and reduced its six and twelve month prices forecasts. 

United States domestic production has soared to 9.14 million barrels a day through December 12th, according to the Energy Information Agency, the highest in records that began in 1983. 

The Organization of Petroleum Exporting Countries, (OPEC) the 12 member exporters’ cartel, voted to maintain its output target at 30 million barrels a day, at its November 27th meeting, despite pleas from Venezuela, Iran and Russian for a price supporting reduction in production.  

Saudi Arabia, the largest swing producer, is defending its market share and pressuring the economics of higher cost shale producers, rather than attempting to focus price higher by restricting supply.  

American shale oil companies, whose production costs vary widely but are mostly between $40 and $80 barrels, are vulnerable to a prolonged decline in oil prices. 

Exploratory oil drilling rigs in the U.S. fell by 61 to 1,421, according to Baker Hughes Inc. an oilfield services company on January 9th, extending the five-week drop to 154. It was the largest decline in since February 1991.

The retail cost of regular gasoline has fallen to the lowest level since May 2009 enabling American to shift spending to consumer goods from fuel and gasoline, providing support for an economy that is 70 percent consumption.

The average nationwide price of a gallon of regular gasoline slipped to $2.13 a gallon yesterday, according to the American Automobile Association, down $0.11 since the beginning of the month and $1.56, 42% from last Aprils top at $3.69. Pump prices were around $2.05 a gallon when oil was last below $50 a barrel.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

wti jan 12

10 yr jan 12

german 10 yr jan 12

 

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