Welcome to CrushTheStreet.com’s Weekly Market Wrap-Up!
Our top story of the week is the valuation decline in an unexpected commodity, crude oil. Ordinarily known as “black gold” amongst professional investors, WTI crude has been absorbing hard hits throughout the year, with this past Wednesday producing a sharp 2% loss, dropping to prices not seen since January. Over on the other side of the Atlantic, Brent crude is trading in its lowest range in almost fourteen months.
This bearish paradigm shift in a notoriously peaky market has left many traders scratching their heads, with geopolitical crises cascading throughout different economic zones. In particular, the violence in the Middle East has reached fever pitch, with U.S. President Barack Obama approving air strikes in Iraq to target key positions held by an extremist Islamic group known as ISIS. The stakes were exponentially raised when members of ISIS brutally executed James Foley, a freelance journalist for the GlobalPost, drawing immediate and deservedly harsh condemnation from the White House.
In theory, such underlying currents should be net positive for oil bulls due to the logical relationship between chaos and supply constraint. This was the primary reason why palladium this year has been a star performer within the precious metals complex, hitting multi-year highs as it challenged the 900-dollar spot price. When the Ukrainian crisis began to escalate, professional investors speculated heavily on the rare, industrial metal, which is mostly mined in Russia, considered by the West as the belligerent in the conflict.
However, palladium remains the odd-ball commodity, an asset that trades on sound reasoning and logic. Its more illustrious cousin gold has been hit hard with volatility in recent sessions, contradicting the typical fear-trade that lifts hard assets in times of uncertainty. In fact, many professional money managers believe that the softness in crude oil prices is a future trend as opposed to a temporary imbalance, alluding to fuel-efficient vehicles, increased North American crude productivity, and the market’s inability to rally with global equities as harbingers of bearish predominance.
Dan Dicker, president of MercBloc and author of Oil’s Endless Bid, goes further, citing investment banks, particularly Morgan Stanley, Goldman Sachs, and JPMorgan, abandoning the oil market business entirely, which used to account for a steady stream of volume. Individual traders, including Dicker himself, have also left the industry, with perhaps 3,000 others jumping ship.
While this may seem good for the average consumer in terms of lower gas prices, the economic reality is that the margins for oil exploration projects become terminally low, thus precipitating an eventual price spike in order for maligned producers to be incentivized back into the business. Combine this with the near-inevitable supply drain from Middle Eastern producers and you have a potential recipe for a violent whiplash effect in the market. But for now, consumers can enjoy the relative reprieve at the pump, which may not last indefinitely.
In financial news, the U.S. equities market had a modest but noteworthy session on Thursday, with the Dow Jones securing the 17,000 level for the first time since July 23rd. The S&P 500 also closed at record highs, with investor confidence lifting off of the announcement of positive economic data from Germany. The precious metals complex reeled from the positive sentiment, as gold dropped down to 1,277 and silver retreating to 19.50 as money shifted into risk-on assets. Palladium was the only precious metal to post positive results, jumping up over 1% to close at 880 on the ask. On the digital currency front, bitcoin suffered some losses earlier in the week, at one point dipping into the 480 range before climbing back to around 520 dollars.