David Sylvain
travelbug blog Are Cryptocurrencies Safe To Invest In?

Are Cryptocurrencies Safe To Invest In?

 

While much of the attention has been directed at the 40% drop in oil prices, the tripling in implied volatility in oil prices is a worth paying attention to and as I will argue later, could have an effect on not just oil the boutique s but on the overall market. As oil prices drop, the effect on value and viability will vary across reserves and that effect should then percolate through to companies. In a Reuter’s poll in December 2013, which surveyed analysts about oil prices in 2014, the lowest price forecast was $75 by Ed Morse, Gobal Head of Commodities Research at Citibank and a longtime bear on oil prices. Early in 2014, Chevron announced that its budgeting would be based upon oil prices of $110/barrel, with John Watson, the company’s CEO, stating, “There is a new reality in our business… At the start of 2014, the price per barrel of Brent crude oil was approximately $108/barrel, following three years of prices higher than $100/barrel.

 

The most sobering aspect of the oil price collapse is that is truly came out of nowhere, with none of the economic forecasters at the start of 2014 predicting the magnitude of the drop. Institutional money continued to flow into oil stocks for most of the year and flowed out only in the last quarter as oil stocks tumbled. The Nasdaq was the strongest market today as Tech stocks rallied the most. NASDAQ Composite: Broad market index of all common stocks and similar securities listed on the NASDAQ stock Exchange. If there is any good news for oil price bulls, it is that oil forecasters are now predicting lower oil prices next year, oil companies are reassessing their assumptions about a normal oil price, airlines are reducing or even suspending their hedging and institutional investors are fleeing from oil stocks. Note that the companies at the production and drilling end of the oil cycle have been hurt the most by lower prices, while the companies that have been hurt the least are at refining and distribution end. Given their collective track record, this may be the best time to bet on rising oil prices.

 

When oil prices drop, the most immediate impact is on oil producers and the ecosystem that serves them, including equipment and service providers. The initial stories about the oil price shock were almost all positive, suggesting that lower gas prices would allow consumers to spend more money on retail, restaurants and other businesses, thus boosting the economy. ” and adding that, “If $100 is the new $20, consumers will pay more for oil.” Chevron was not alone in this assessment and oil companies globally made investment, acquisition and production decisions based upon the assumption that triple-digit oil prices were here to stay, which explains why at a $60 oil price or lower, almost a trillion dollars in investments made by oil companies were no longer viable. By changing the payoff to growth and the risk in the company, a change in oil price can have a multiplier effect on value. If you can measure earnings expectations, an earnings surprise should have an effect on stock prices, with positive (negative) surprises evoking positive (negative) responses. Note that I was using this measure of profitability as a rough proxy for the cost of reserves owned by companies, since you should expect companies with higher cost reserves to be hurt more by lower oil prices than those with lower cost reserves.

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