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The Era Of Cheap Credit Is Over, Time For Markets To Wake Up

Financial markets repeatedly cling to bits of data to justify irrational conclusions about the current state of the economy. The latest attention-grabbing headline is the great jobs report that was released on January 8.

We are in an era where most people read headlines handed to them by either the government or media without questioning the narratives or actually researching the underlying numbers. We also live in a time when those armed with research and knowledge can get run over by the propaganda. I have written extensively how BOTH the EIA/IEA have been successful at fooling the markets into thinking that the supply/demand imbalances in oil are greater than they actually are. The effect has been to mislead the markets, depressing prices more than what fundamentals dictate.

Eventually, reality must prevail. When the realization sets in that crude oil markets are tighter than the headlines make it seem, it will come at a time when demand in the industrial sectors will be accelerating, likely in 2017 (tied to new policy). This will lead to another commodity super cycle. When that happens, fewer producers of commodities will be willing or able to expand production, as the era of cheap credit is over. At the same time, OPEC will have historically low spare capacity, and will be unable to come to the rescue. Higher prices will soon follow.

Related: Oil Prices Tank Ahead Of Inventory Reports

The past few years there has been a startling disconnect between government and private sector statistics. One of the most egregious is the exaggerated GDP stats in China, where 7 percent growth cannot be supported by weak underlying commodity demand. Chinese energy demand recently has been nearly flat, especially in industrial sector. That undercuts the thesis that China’s economy is growing robustly.

The collapse of industrial commodity prices below 2009 levels illustrate this. Take a look at Chinese electricity demand at 1.2 percent growth in 2015 (see below). How does that square with 7 percent GDP growth? Have the Chinese somehow invented a new electricity source or a way to grow there economy without electricity?

The latest BLS jobs report here in the US, which every media outlet was fascinated with, showed over 280,000 jobs added in December. However, backing out the seasonal adjustment (same sort of arbitrary adjustments made by EIA in oil) only around 11,000 jobs were added for December.

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Other metrics also point to a feeble economy, including Fed regional stats, weak U.S. and Chinese manufacturing data, and flat wages. In fact, wage growth in the U.S. has stagnated for nearly a decade as more low paying jobs are being added to the service sectors (65 percent of Americans now earn under $30K/year, the highest ever) vs higher paying ones.

Everyone knows the so called adjusted unemployment rate of 5 percent is a farce. The BLS labor force statistics do not capture the real unemployment rate, which is closer to 9 percent. And the record low participation rate bears that out completely.

The point to all of this is to show that things are not what they seem. Only now are the equity markets starting to figure that out as the QE games end in failure. In short, the Fed is what propped up the markets, not the economy.

Related: Bearish Sentiment Takes Complete Hold Of Oil Markets


The economy is not healthy despite claims that lower commodity prices would boost consumer spending, a phenomenon that never materialized. The industrial sector is in recession and now that the wealth effect from the 1 percent is reversing, so will the jobs, as they are the classic lagging indicator.

The Fed punch bowl is empty, so if you run a small business or just have your nest egg invested in the bubble equity markets, please think twice about expanding or being fully invested in the markets, because things are not what they seem and have not been for a long time.

By Leonard Brecken of Oilprice.com

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  • Len on January 14 2016 said:

    Reading my past articles I layout that at these prices no cos is FCF positive and even $50 thats a stretch. External funding is being cut off so what then will happen? Depletion accelerates as cap ex continues to fall...low cost wells are being run dry as thats all the focus....as gov chg policies shifting from service sector to manufacturing via tax & lower regulation then real growth will accelerate, but there will be a period where US E&P wont expand production cause they cant causing inv to deplete driving prices higher. At least thats the theory. U watch media turn on dime & EIA on bashing oil too if regime chg occurs.
  • robert millman on January 13 2016 said:
    IF Chinese industrial activity stays subdued for years, why should commodity prices rise?
  • robert millman on January 13 2016 said:
    Mr. Brecken--There is something that does not square in your otherwise sensible analysis: IF the Chinese slow down on the industrial side is for real and continues for several years, why should demand for commodities increase thus leading to higher prices? Low cost producers in Canada and the USA wil disappear. Their better assets will be bought by survivors. Countries depedent on selling oil have no choice but to continue to do so. SA's control over OPEC is largely gone. Maybe Oil gets to 45-50. No good reason for it to go higher especially if it will not be debt fueled any longer. Bob Millman

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