Crude oil prices are now mired well below $50 per barrel, and they look to be heading lower still. While some of the price pressures are obvious, there is one that may be less so: hedge fund liquidations. The list of funds that have had to enact capital preservation measures is growing by the day, and the names are notable: Tudor Investments, Fortress Investments, and D.E. Shaw have all reported that several of their funds have “thrown up the gates” preventing further investor redemptions, due to being swamped by requests for redemptions from investors that must be met by year-end.
These are probably the most notable instances of what is happening, but they are hardly alone. I believe the liquidations underway to meet these year-end cash payouts are putting tremendous pressure on commodity prices across the board. This wave of liquidations should be expected to continue over the next several weeks, and could easily result in crude oil prices dipping down into the mid-30s. However, once this round of selling is concluded, I would expect a significant rebound in prices as we enter 2009.
I reviewed the historical price chart for crude oil, when it collapsed it 1998 to around the $10 level. History may be repeating itself. On October 1, 1998 crude oil fetched just over $16 per barrel and quickly fell to a low of $10.35 on December 21st. By May 1, 1999, prices rebounded to well over $18 per barrel. Fast forward to today, and we have crude falling from $102 from October 2nd to the mid-40s, this morning.
Obviously, the economic landscape is much more challenging today than it was in late 1999, as the economy was enthralled in early part of the dot com boom.
However, even with China’s economy slowing and the dim economic data before us, the extent of the sell-off seems to have over shot, the same way $147 per barrel did on the upside. With more and more expansion plans being shelved by energy companies and production cutbacks from both OPEC and Non-OPEC producers looming, energy supplies will quickly tighten, as the global economy turns back up, even modestly.
Investors should also take note of the performance of the oil majors like ExxonMobil ,Chevron , and BP . Their shares prices never went hyperbolic with the price of oil, but even with the nearly $60 dollar drop from October, their share prices have been relatively stable and their recent lows probably represent long-term bottoms.
The crash in energy prices is incredibly simulative to the economy. I submit that the energy price shock of last summer had as much as anything to do with our current economic straits. Each of the last several recessions, including the relatively tame circa 2001 recession, have been preceded by a spike in energy prices.
This morning’s devastating employment report, which showed a loss of 533,000 jobs, certainly represents a challenge to my thesis that prices can rebound in the first quarter of next year. However, it appears everyone from investors to hedge fund to companies are clearing the decks ahead of the New Year. With the worst of the news being put behind us, and prices declines for oil into the $30s, the case for a rebound remains sound.
- Economy Sheds 533,000 Jobs, Most in 34 Years
- Jobs Numbers: Breakdown by Sector
The lone bright spot will remain at the gasoline pump. Look for the national average to approach a $1.50, and I am not sure that some communities will see sub-$1.00 gasoline, before things turn around.
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.