Oil Indicator

Oil & Gas

The Real Driver of the World’s Economy

Global Economic Growth In Serious Trouble When U.S. Shale Oil Peaks & Declines

We must remember this simple fact; energy drives the markets, not finance. Finance steers the market.  So, for the economy to expand, there must be oil production growth.  However, it would be unwise for the market-economy to rely upon the U.S. shale industry as the leading driver of global oil production growth for the foreseeable future. 

The global economy would be in serious trouble if it weren’t for the rapid growth of U.S. shale oil production.  Since the 2008 financial crisis, U.S. shale oil production has increased by more than 6 million barrels per day.  Without these additional barrels of oil, the massive money printing and asset purchases by the central banks would not have been as successful in propping up the economy and markets. 

So, what happens when shale production finally peaks and declines in a BIG WAY?  It will severely impact the world economy because with U.S. shale oil accounting for 66% of the rise in global oil production over the past decade, it was the leading driver for economic growth.

DYI:  Oil and gas has the advantage over all other forms of energy with its high concentration of deliverable BTU’s powering an incalculable amount of machines that revolutionized our economy today.  Without abundant low cost energy the world’s economy will slide backwards in standard of living.

 

DYI’S oil indicator plays off of this energy reality.  The author is correct what has driven markets higher since 2009 bottom for stocks was/is the horizontal shale drilling [fracking] pushing up the world’s supply of oil and gas.  So much so the U.S. is actually producing both oil and gas greater than Saudi Arabia!  So far our indicator has a green light for stocks as oil prices remain lower than they were 5 years ago thus providing a reduction in cost similar to a tax reduction putting more money into the hands of our everyday citizens.

 

However this tax like effect will only last approximately 5 years in length before wearing off when valuations of the market will take over.  This is only an approximation of course, as this effect is slated to run out by December unless prices continue to decline due to increase production and NOT cyclical economic decline [recession/depression].

Bottom line is this.  The tax effect reduction is now in the stage of wearing off unless another game changer discovery for oil and gas arrives soon [an unlikely event] expect stock prices to reflect their respective valuation.  With a sky high stock market just as one is on top of a mountain no matter what direction you go you’re going lower. 

Oil Indicator

05/01/19
Updated Monthly

Oil Prices: 
04/01/14....$105.11

04/01/19......$70.50   

Down 33%(rounded)
(oil prices approximately five years earlier due to weekends & holidays)
ANS West Coast prices   

 OIL INDICATOR:  Positive  Oil indicator will remain positive until it's rise is greater than 75% from five years earlier.

Oil prices are well known for their volatility in the short term, longer term due to dwindling reserves energy prices are in a secular bull market.  Technologies such as fracking will extend the life of oil fields but major new discoveries arrive at a snails pace far slower than the world's growth.  

As long as prices rise in a slow and orderly pace our economy can adjust to those changes, however if prices spike (international tensions, war etc.) high energy costs behave as a massive deflationary tax. This will send our economy tumbling down and very possibly the U.S. stock market.

If oil prices rise greater than 75% from five years earlier, investors at that time should shift their portfolio geared towards deflationary times.  This would be an oil indicator as negative.

If oil prices rise from five years earlier less than 10% or drop then the inflationary play is in effect; a positive for economic growth along with possible higher stock prices.

Where to find five year earlier oil prices?  Alaska Department of Revenue    

Oil indicator positive                
  5%  High-Yield Corporate Bonds
10%  REIT's
10%  Energy
10%  P.M.'s
65%  Small Caps
  0%  Lt. Gov't Bonds

Oil indicator negative
  5%  REIT's
10%  Energy
10%  P.M's
10%  Small Caps
65%  Lt. Gov't Bonds

Vanguard Funds

REIT's
REIT Index Admiral  VGSLX

Energy
Energy Fund  VGENX

Precious Metals (P.M.'s)
Global Capital Cycles Fund VGPMX

Small Caps
Small Cap Value Index Admiral  VSIAX

High-Yield Corporate Bonds
High-Yield Corporate Bond Fund VWEHX

Long Term Government Bonds
Long-Term Government Bond Index Admiral  VLGSX

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