What happens To The Global Economy If Oil Collapses Below $40
Currently, commodity prices are the cheapest they’ve been in over 40 years compared to equity prices. US Equities have continued to rise over the past 7+ years due to a number of external processes. QE1, 2, 3, and Fed Debt Purchases Share Buy-Backs and creative credit facilities. Only recently have investors really started to pile into the US stock market (see charts below). Global investors were very cautious throughout the rally from 2011 to 2016. In fact, the amount of capital invested within the US money market accounts was relatively flat throughout that entire time.
It was only after the 2016 US presidentialelection that investors really began to have confidence in the global economyand started piling into the US stock market and money market accounts. This was also after the time that Oil beganto collapse (2014~16) as well as the deflation of Emerging Markets rallies. With all this new money having entered theglobal markets and equities being extremely overbought currently, what wouldhappen is Oil collapsed below $40 and the global economic outlook soured headedinto the 2020 US presidential election?
Currently, Oil has followed our ADL predictive modeling relatively closely over the past few months. Although the attack in Saudi Arabia sent prices skyrocketing in mid-September, Crude price has generally stayed within our expected ranges and has recently settled near $55. If you notice the two GREEN BARS on the chart, above, September and October price expectations suggested price settling near $54 and 59 throughout those two months. Now, with November upon us, the ADL predictive modeling system is suggesting Oil prices will collapse from levels near $58 to levels near $40 – a massive 31% price collapse. In reality, the price could fall below on a deeper price decline event.
This Crude Oil chart highlights what webelieve may happen in Oil over the next few weeks and months – where price maycollapse below $40. Yet, we startedasking another question.. What happensto the global economy if Oil prices collapse below $40 before the end of 2019? What happens to the nations thatdepend on exported Oil income and to central bank functions within the economy?
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When we start to understand the correlationbetween the price of Oil and the expectations throughout the global market, wemust immediately focus on the income expectations of nations that rely on oilas the main source of income. If our ADLpredictions are correct, Oil will begin to plunge to levels near $40 (possiblybelow $40) over the next 3~4 months. Howwill foreign nations react to this loss of income and who are the mostdependent nations on Oil revenues.
Oil-producing nations vary in scale across the world, yet the United States, Saudi Arabia and Russia are the largest producers. Nations that are the most dependent on Oil revenues are some of the smaller, less mature economies of the world. Should the supply of oil stay relatively consistent across the globe while an extended economic contraction continues, we must begin to question the sustainability of various nations in terms of oil revenues.
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For many of these nations, the income fromOil exports make up more than 15% of their annual GDP – in some cases, withBrunei, Kuwait, Libya, the Republic of Congo, Saudi Arabia and Singapore, oilrevenues make up more than 30% of GDP. How would a dramatic decrease in oil prices act as an economicdestabilization event for these nations? Could they survive the event?
If the price of oil were to fall to $40 fromcurrent levels (near $67), this would represent a 40%+ price decline. Oil revenues for all nations would likelycollapse by similar amounts. Nationsthat are most dependent on oil revenues would be hardest hit and this decreasein national revenue would likely increase strains on future operations,debt/credit as well as potentially create massive social unrest and strife.
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If our ADL predictive modeling system is accurate and oil prices collapse to near $40, the economic, social and future strains this creates for many nations become even more severe – at a time when an economic contraction is taking place. This type of commodity price collapse could lead the world into a chaotic economic mess if it is prolonged.
In Part II of this article, we’ll explore the ramifications of this potential oil price collapse across the global stock market and other factors that may be setting up to drive a period of uncertainty and volatility within the global markets.
Opportunities are all around us. Using the right tools to identify the true technical cycles, price cycles, and trading setup can help to eliminate risks and hone into more profitable trades. It is almost impossible to time market tops and bottoms accurately, yet, as you can see from our work above, we have tools that can help us see into the future and help to predict when major price peaks and valleys should form. Using a tool like this to help you determine when the real opportunity exists and when to time your trades will only improve your market insights and trading results….
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What happens To The Global Economy If Oil Collapses Below $40 – Part II
We believe this type of global commodity price collapse, essentially collapse in oil revenues for many global nations could present a very real crisis in our future. Most of the oil-producing nations rely on stable oil prices to supply much-needed revenues/income to support current and future operations and essential services. If oil prices collapse to levels below $40, this decrease would represent a -40%, or more, collapse in oil revenues for these nations. If oil prices fall to levels below $30, this would represent a -55%, or more, decrease in expected revenues.
We believe the ADL predictive modeling systems results, if accurate, represents a very real potential that the global capital markets and stock market may experience a major crisis event before the end of 2020. This type of commodity collapse happened once before in history – nearly 10 years before the 1929 US stock market collapse and the slide in commodity prices continued in 1930 and beyond as an extended economic contraction pushed the US into an economic depression.
Producer Price Index for All Commodities from 1914 to 1933
Take a look at these charts for comparison. The first is a chart of the Producer Price Index for All Commodities from 1914 to 1933. Pay close attention to how commodity prices collapsed in 1921, approximately 9 to 10 years before the US stock market peak (1929) and commodities continue to slide lower. This collapse in commodity prices relates to the consumer, agriculture, and industrial demand after WWI and setup a shift within the capital markets more focused on stock market speculation. The period between 1923 and 1929 resulted in a complete shift in the capital markets where farms, agriculture, and manufacturing levels decreased while urban areas, cities, and the stock market flourished – until it ended in 1929. (Source: https://eh.net/encyclopedia)
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Monthly Crude Oil chart
Now, take a look at this Monthly Crude Oil chart which highlights very similar types of price patterns over the span of about 10 years. This strangely similar chart, in combination with the strangely similar set of circumstances related to farm, agriculture, and manufacturing as well as the shift of capital towards speculation in the US/Global stock market may be setting up another type of 1929 stock market peak event.
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When Oil Collapses Below $40 What Happens? PART III
This, the final section of this multi-part research article, will continue our exploration of the consequences that may result from our ADL predictive modeling system’s suggestion that Oil may continue to fall to levels below $40 over the next few months.
In Part I and Part II, we’ve highlighted what we believe to be very compelling evidence that any continue oil price decline from current levels may be setting up the global markets for a massively volatile price reversion – similar to what happened in 1929.
Prior to the stock market collapse in 1929 and the start of the Great Depression, commodity prices collapsed in 1921 and again in 1930. This commodity price collapse was the result of over-supply and a dramatic change in investor mentality. The shift away from tangible items and real successful investing/manufacturing and towards speculation in the housing markets and stock market.
1999: the DOT COM bubble burst after a mild recession in 1993-94 and a stock market rally from 1996 to 1999
September 11, 2001: Terrorist Attack on US soil. Shocked the world and global stock markets. Sent the world’s economy into severe contraction. US Fed lowered interest rates from 6.25% to 1.0% from 2001 to 2003.
2004-06: US Fed begins raising rates from 1.0% and gradually increased rates to 5.25% in August 2006: +525%. Pushing the US credit market, and housing market, over the edge and starting the 2008 Credit Crisis.
2007-2008: US Fed lowered interest rates to near ZERO over a very short 16-month span of time as the US Credit Crisis event unfolded.
2009-15: US Fed continued to keep interest rates near zero throughout this time-frame and continued to pump capital in the global capital markets with multiple QE and debt buying events. Other global central banks followed the US lead providing additional capital throughout the global markets. This massive expansion of credit/debt over a 7+ year span of time allowed foreign nations to “binge” on cheap US and Euro credit/debt while an Emerging Market and Foreign Market recovery were taking place.
2016-2019: US Fed raised interest rates from 0.08% to 2.42% over this span of time. Pushing US Fed rates up by the highest percentage levels EVER: +3025%
This continued global cycle of “boom and bust”has wreaked havoc on global consumers and business enterprises. Over the past 20+ years, various cycles ofeconomic appreciation and depreciation have left some people considerablybetter suited to deal with these cycles while others have been completelydestroyed by these events. Now, itappears we are entering another period of “early warning” as globalmanufacturing activity, growth and economic output appears to be waning. Are weentering another period like the 1929 to 1940 period of the US where a globaleconomic contraction resulted in a deeper economic recession/depression andtook 15+ years to recover from?
The US Fed has recently started acquiringassets again – at a far greater rate than at any time since 2012. It is very likely that the US Fed is“front-running” a crisis event that is already starting to unravel again –possibly aligned with institutional banking entities and global credit/debtrisks.
Chinese factory orders have continued to fall recently and the news is starting to trickle out of China that the US trade tariffs have done far greater damage than currently expected. This suggests that manufacturing, exports, and GDP for China have entered a massive decline. What happens next is that commodity prices collapse because of the lack of demand from manufacturers and consumers. (Source: https://www.yahoo.com/finance/)
Chinese new loan origination rates have fallen to a 22 month “new low” – which suggests corporate and consumer borrowers are simply not willing to take on any new debt/credit at the moment. This happens when a population decides they want to “disconnect” from any economic risks and shift towards a “protectionist” process. (Source: https://finance.yahoo.com)
Recent news suggests that Chinese demand for European consumer and luxury goods has also contracted dramatically. Germany will release GDP estimates on November 14th. It is our opinion that the Chinese have already shifted into a more protectionist consumer stance and that would mean that demand for non-essential items (call them high-risk purchases) are very low at this time. If this is the case, the lack of true demand origination out of China/Asia could push much of Europe into a recession. (Source: https://www.yahoo.com/)
The last thing China would want right now isto blow the potential for any type of US/China trade deal – even if it meansgiving up more than they may have considered many months ago. More tariffs or any type of tit-for-tatretaliatory trade war would not be in the best interest of either party at thisstage of the game. Who flinches first? The US, or China, or the rest of theworld?
So, the question, again, becomes.. “will a commodity collapse lead the globalstock market into a prolonged period of price decline and/or a global recessionover the next 10+ years?”
If so, can we expect commodities to collapse as they did after the 1929 stock market peak?
You may remember this chart from the earliersections of this multi-part article. Ithighlights what happened leading up to the 1929 stock market crash and howearly warning signs of manufacturing and agriculture weakness continued toplague the markets while speculation in housing and the stock market pushedcertain asset values much higher near the end of the “Roaring 20s”.
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Are we setting up for the same type of event right now where global trade, manufacturing, and agriculture are weakening after the 2008 Credit Crisis and we are meandering towards a repetition of the events that led to the “Great Depression”? Will commodities prices collapse to 2002 or 2003 levels for most items? Will Oil collapse to levels below $30 ppb over the next 6 to 12+ months? And what will happen to Gold and Silver throughout this time?
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Can we navigate through these troubling events without risking some type of new collapse event or reversion event? Are the central banks prepared for this? Are traders/investors prepared for this? Just how close are we to the start of this type of event?
Even if a trade deal between the US and China were to happen today and eliminate all trade tariffs, would this change anything or would this simply pour fuel onto the “capital shift” fire that is already taking place with speculation reaching frothy levels?
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Is The Energy Sector Setting Up Another Great Entry?
With US oil production near highs and a shift taking place toward electric and hybrid vehicles, the US and global demand for oil has fallen in recent years. By our estimates, the two biggest factors keeping oil prices below $75 ppb are the shift by consumers across the globe to move towards more energy-efficient vehicles and the massive new supply capabilities within the US.
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Inverse Energy ETF ERY Daily Chart
This leads us to believe the inverse Energy ETF, ERY, maybe setting up a very nice bottom in price below $40. Ultimately, we believe a deeper price bottom may set up in the next 10 days where ERY may trade below the $36~37 range, but time will tell if we are correct about this or not.
Historically, price levels below $40 have resulted in some very nice long trade setups in ERY. This ERY Daily chart highlights the Support Channel we believe exists in ERY and why we believe any entry-level below $36
Weekly ERY Chart
This Weekly ERY chart highlights the past rallies that have originated from within the Support Channel. Pay special attention to the size and scope of these moves. The October 2018 rally resulted in a 183% price rally. The April 2019 rally resulted in a 57% price rally. The July 2019 rally resulted in a 50% price rally and the last move in September 2019 resulted in a 41% price rally.
Could this next setup in ERY be preparingfor another 40% to 60%+ upside price rally?
We believe the setup in ERY is very close togenerating an entry trigger. We have notissued any new trade triggers for our members-only service as we are waitingfor confirmation of a potentially deeper price move in ERY. Right now, get ready for what may become avery good setup in ERY over the next few weeks.
Watch what happens in the energy sector overthe next 30 to 60 days. We may besetting up for a fairly large price rotation as the tensions spill over intothe global markets and precious metals. We may find that Oil is the big loser over the next 60+ days.
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Has the Equities Waterfall Event Started Or A Buying Opportunity?
Daily Dow Jones Industrial Chart
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This Daily Dow Jones Industrial chart highlights the huge Gap lower that took place early on Monday, February 24, 2020. This huge move resulted from an extended fear of a growing potential for a global pandemic event and a renewed fear that global economic activity may be greatly reduced over the next 12+ months.
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Gold Sets Up For Another Massive Move Higher
Weekly Gold Price Pattern from 2007 – 2017
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This chart, below, highlights the downside price rotation that took place just before and as the US stock markets collapsed in late 2008 and 2009. Notice how Gold collapsed nearly 28% right as extreme market weakness began to become present in the US stock market. Then, pay attention to how Gold rallied from $730 in multiple upside price legs to a peak just below $1900 – well above 110%. Could the same pattern already be setting up in 2020?
Weekly Gold Chart Trend is Clearly Up
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This current Gold chart highlights what we believe is a similar price pattern where Gold collapsed as the downturn in the US stock market took place between October 2018 and December 2018. Subsequently, Gold then rallied to levels nearing the previous peak levels (near $1380), then rallied even further to $1540. We believe the current downside price rotation is similar to the downside price rotation that took place in August/Sept 2010 – just before Gold rallied from $1050 to $1890 (+85%). If a similar type of rally were to take place from the current $1587 lows, the peak price of Gold may be near $2935.
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Is Silver & Gold Mirroring 1999 to 2011 Again?
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_ Gold prices begin to rally moderately while pushing the Gold/Silver ratio higher over an extended period of time (from 1999 to 2003: about 4 years).
_ The Gold/Silver ratio peaks and begins to decline in mid-2003as the price of Gold continues to rally at a bit more accelerated rate.
_ Gold prices begin a parabolic upside price advance in early2006 after the Gold/Silver ratio collapses about 18% to 20% from the peak levelnear 82.50.
We believe a similar type of pattern is setting up right now in the metals market and we believe both Gold and Silver will engage in a price advance over the next 10+ months that may be similar to the post-A set up in mid-2003. If you are familiar with what happened in the metals market at that time, Silver began to advance at a faster rate than the price of Gold advanced. This is what caused the Gold/Silver ratio to begin to collapse.
This Silver chart from 1993 to 2004 clearly shows how the price of Silver was reacting throughout the setup prior to “A” and after “A” in the chart (above). Silver began a moderate price advance in 1993 from a level near $3.50 and advanced to a level near $7.50 in 1998. Then, it began a downside price move to reach new lows in 2002. At that point, the markets changed. Gold and Silver began to advance almost in unison with Gold still advancing slightly more than Silver until early/mid-2003. Once Silver broke dramatically higher, in late 2003-04, the Gold/Silver ratio started breaking downward instead of upward. This is the pattern we are seeing in the metals market right now.
We believe the recent rotation in the metals market and thedramatic price divergence between Gold and Silver are setting up anothersimilar type of pattern that could prompt both Silver and Gold to rally upwardfrom current levels by at least 200%.
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Concerned That Asia Could Blow A Hole In Future Economic Recovery
Thinking somewhat far off into the future, our researchers believe China/Asia could become the next Black Hole in the global economy. China recently released its March PMI number which came in at 52.0 – showing moderate expansion in Chinese manufacturing. The February Chinese PMI level was 35.7. We strongly believe China wants to show some strength in their perceived economic recovery and that these PMI numbers are somewhat “manufactured for effect”.
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We believe the real economic toll taking place in China/Asia will continue to unfold over the next 3 to 6+ months as the historic expansion of wealth and the exported foreign investment from Wealthy Chinese continues to contract over this time. In a very similar manner to what happened in the US when the Japanese economy contracted in the 1990s – as wealth creation processes collapse, these foreign investors suddenly start to liquidate assets trying to protect their “home-country assets”.
As the COVID-19 virus event continues to unfold, the data from global nations will quickly identify any outlier factors and data points related to China/Asia and how they are reporting their data. Chinese economic data has raised suspicions for quite some time with global analysts. It seems highly unlikely that the Chinese economy rebounded from an almost complete shutdown in February and most of March to a moderate manufacturing growth level at the end of March 2020. Meanwhile, throughout the rest of the globe, economies, and manufacturing levels are contracting as the COVID-19 shutdown continues.
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