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The start of ‘the Great American Oil Bust’ as Saudis drown shale boom

If the terror attacks and the arm-in-arm march in the streets of Paris were enough to steal the attention away from the oil collapse, Saudi Prince Alwaleed and his bold words were enough to thrust it right back in the spotlight. That, and the fact that crude just broke below $45 a barrel.

Now, as the price continues to plunge to levels not seen in almost six years, pundits are still trying to make sense of it all. And they’re mostly failing. Investors, for whatever reason, seem to be confident that a bottom is forming, as they pour cash into oil-related funds.

But those hoping for a V-shaped rebound might be disappointed, warns Wolf Richter in his post, “This Is Just the Beginning of the Great American Oil Bust” (more from him below).

Speaking of the big “V,” we’ve grown quite accustomed to that shape when it comes to equities. No selloff too big to reverse. Over the past year, a V-shaped recovery has saved every pullback. It’s getting to the point where it feels like a gift-wrapped play for dip-buyers.

But Charlie Bilello of Pension Partners is wary about it this time around. He says defensive behavior is taking over, as seen by widening credit spreads, lower inflation expectations, dropping Treasury yields and defensive sectors leading the way.

“Collectively, this behavior suggests that the risk/reward is changing, and not for the better,” he said. “After six consecutive years of gains, this subtle shift in environment is undoubtedly going unnoticed by most investors. What would get their attention? You guessed it: only a failed V.”

Key market gauges

Crude CLG5, -3.23% is down below $45 a barrel on fears that U.S. stockpiles will increase. Gold GCG5, +0.54% is up a tad as it looks to keep its momentum. Futures on the Dow YMH5, +0.39% and the S&P ESH5, +0.38% have popped a bit higher, helped by weak data out of Europe that will only heap pressure on the ECB to act when it meets later this month. Asia ADOW, +0.38% ended mixed but mostly caught in a tight range. Europe SXXP, +0.77% is up on that German and Greek data showing weak prices.

The quote of the day

“The biggest bubble out there is central bank credibility. If Draghi was a stock he’d be on a P/E of 200! Yellen’s on 100. When that bubble pops, all hell will break loose again, and there you really just want to be in cash.” — Former Morgan Stanley Strategist Gerard Minack, in an interview with The Age.

Earnings

Alcoa AA, +2.35% shares are up premarket after the aluminum maker got earnings season started on the right foot with an earnings beat. Rising metals prices and strong demand from the automotive and aerospace markets provided a nice tailwind. Shares of Wolverine Worldwide WWW, +0.37% could see plenty of pressure after the apparel and footwear company provided a downbeat profit outlook for 2015.

CSX CSX, -1.42% is set to report today.

The economy

The U.S. Labor Department will release the jobs openings and labor turnover survey (JOLTS) at 10 a.m. Eastern., and it should confirm what the jobs report from last week told us: It’s getting better and better out there. But before that, the NFIB small business optimism index hits at 9:00 a.m. Eastern. Read: Data likely to show job openings near a multi-year high.

The buzz

Google GOOG, -0.73% is on the bear-market watch list today after the stock fell to its lowest levels in more than a year on Monday. It’s now within reach of its first bear market in almost four years, thanks to losing ground in nine of the past 10 trading session. Not much respite this morning, as the shares are drifting lower premarket. Read: Google is the new Microsoft

The weakness in crude and gold has stolen much of the commodity ink over the past few months, but copper HGH5, -2.95% is also worth keeping an eye on as it drops below 2009 levels. “Copper is continuing to tell us that global economic growth is slowing as its price is now at levels not seen since October 2009,” a GaveKal Capital blogger wrote.

One of the highlights from the massive car show in Detroit takes place this afternoon when Tesla’s TSLA, -2.15% Elon Musk shares his thoughts at the Automotive News World Congress at the Renaissance Center. He’s not afraid to mix it up either, so look for some quotables to come out of this one by the time it’s over.

RadioShack RSH, +2.63% may be barely breathing, but its stock is up double-digits this morning on word Salus Capital had offered the struggling retailer $500 million in turnaround financing.

The chart of the day

Here’s a clear visualization, courtesy of blogger Zero Hedge, of how core OPEC producers are “intent on drowning the shale oil industry in excess supply.” Basically, amid a price-crushing glut of oil, rig counts in Saudi Arabia, Kuwait and UAE have surged. At the same time, U.S. rig counts have plunged to 14-month lows. The last time the Saudis flooded the market, the U.S. rig count was cut in half and then some, Zero Hedge pointed out in the blog post.

The call of the day

If you’re one of those buy-when-others-are-selling types, then you have to be sniffing around the oil sector these days. And you wouldn’t be alone. The four biggest exchange-traded oil-related funds enjoyed inflows of $1.23 billion in December, the most since May of 2010, according to Bloomberg. Another $110 million poured in during the start of January. As Wolf Richter warns, “these investors are betting on a quick rebound... A sign that there isn’t nearly enough blood in the streets yet.” They are probably looking at the V-shaped bounce in oil after the Fed fought the financial crisis with its QE program. Yet another QE could rescue this plunge, but Richter doesn’t see it going down that way. “If this oil bust is anything like classic oil busts, and the Fed sits on its hands, it may take years before this is worked out,” he said. “The last time, the Fed stepped in. This time, it may not. Instead, the classic oil bust may play out in its drawn-out brutal manner.”

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