Famed oil expert Daniel Yergin penned an op-ed for the WSJ on Monday titled “The Global Shakeout from Plunging Oil.” He starts off by observing: “The decision by OPEC on Thursday not to cut production reflects a profound shift in the world oil market. The demand for oil–by China and other emerging economies–is no longer the dominant factor. Instead, the surge in U.S. oil production, bolstered by additional new supply from Canada, is decisive. This surge is on a scale that most oil exporters had not anticipated. The turmoil in prices, with spasmodic plunges over the past few days, will likely continue.”
WTI oil has traded down to $69 versus $110 in June! While there are certainly winners (consumers) and losers (oil producers, Russia, Iran, etc.) from this, in general it is good thing for growth. The IMF said falling oil prices would lift the 2015 US growth rate to 3.5% from their previous projection of 3.1%. And it will also dampen inflation. In fact, inflation expectations have fallen almost ½% in the past few months.
The chart below illustrates that commodities have been down across the board since their recent highs in 2011. It’s not just oil! While APCM owns broad based commodity ETN’s as an inflation hedge we have been underweight versus our long term strategic allocation for several years.
Chief Investment Officer