Business

Why the oil price tailspin may be short lived

Posted November 4, 2018 6:55 a.m. EST

— 1. Boom to bust: A funny thing happened on the way to $100 oil: Crude crashed into a near bear market.

US oil prices plunged to as low as $62.63 a barrel on Friday, down a stunning 18.6% from its peak just a month earlier.

Crude's tailspin was engineered by a range of factors, some of which may be fading.

First, the global growth fears that sent stock markets careening lower spilled into commodities. If the economy runs into trouble, it stands to reason that the appetite for oil will slide as well.

Second, Washington handed out get-out-of-jail-free cards to some countries. The Trump administration announced on Friday that temporary waivers have been granted for some of Iran's oil buyers, allowing them to keep buying oil from Iran even when sanctions return on Monday. It represents a softer approach than some feared.

"The decision to grant waivers is quite logical as too big an initial loss in supply would have pushed prices sharply higher," Damien Courvalin, head of energy research at Goldman Sachs, wrote to clients on Thursday, "going against the US administration's effort to keep a lid on gasoline prices."

And third, Texas and Saudi Arabia have stepped up to the plate to ease fears of a shortage of oil. US oil output, led by the Permian Basin in West Texas, spiked above 11 million barrels per day in August for the first time ever.

"There's been astonishing production growth from the States," said Matt Badiali, senior research analyst at Banyan Hill Research, which specializes in oil and commodities. "We're in uncharted territory."

All of this has silenced talk of $100 a barrel oil.

The oil plunge came just in time for the midterm elections in the United States. The national average gasoline price is down 3% over the past month, according to AAA. Prices at the pump lag behind oil, suggesting cheaper gas is on the way.

But some analysts are warning that oil prices are likely to renew their surge. Goldman Sachs and RBC Capital Markets are calling for Brent crude to end the year at $80 a barrel, 10% above current levels.

Courvalin cautioned that Iran's oil shipments, which stood at nearly 3 million barrels a day in May, will keep dwindling as buyers wean themselves off. He expects exports to slide to 1.15 million barrels per day by year end and then 1 million in early 2019.

That could be a problem because there's substantial doubt that the United States and Saudi Arabia can make up for the lost Iranian barrels. Saudi Arabia's recent output hikes leave the kingdom with less room to respond to future problems.

"Saudi Arabia is producing flat-out. They are maxed out," said Badiali.

The US shale boom is experiencing growth pains. The Permian Basin is pumping so much oil that the region is running out of pipelines, creating bottlenecks that limit output. The problem may not get fixed until mid-2019.

In other words, there may be less firepower just as Iran's exports continue to shrink.

2. Election day: The American midterm elections are happening on Tuesday. If Democrats take control of the House, what will happen to stocks?

One fear is that a big win for the Democrats could lead to proposals to dial back President Donald Trump's tax cuts. Or at a minimum, this would end efforts to extend the tax cuts on individuals that are set to expire in 2025.

CNN's Harry Enten predicts in The Forecast that Democrats will win a 17-seat majority in the House but Republicans will maintain their slight edge in the Senate. A rollback on Trump's tax bill likely won't happen -- but a new tax cut is equally unlikely. A split decision from the midterms would probably keep America's fiscal, trade and regulatory policies on the same trajectory.

3. Goodbye October: October was a frightening month for investors around the world, so investors are cheering that it's finally November.

Fears about slowing growth, trade wars and higher interest rates all pushed global markets sharply lower. So, what's in store for this month? Brian Belski, chief investment strategist for BMO Capital Markets, recently told CNN Business he thinks October was just a "correction within a very large secular longer-term bull market."

The US economy is still enjoying brisk growth and Corporate America is making gobs of money, even if it's at a slower pace.

Rising rates weighed heavily on the markets the past couple months, however, so investors will be closely watching the Fed, which meets Wednesday, for any signs of faster or steeper interest rate hikes.

4. Digital earnings: Etsy, Yelp, Zillow, TripAdvisor, GoDaddy and Match Group all report earnings this week.

IAC will report its quarterly finances on Wednesday. The Tinder-owner is currently embroiled in a lawsuit with the dating app's co-founders over its valuation. Earlier this month, IAC asked a judge to throw it out because they argues the co-founders were months too late to file such a suit.

The company has been on a hot streak this year, partly because of Tinder's popularity. The stock is up a whopping 63% this year.

5. Media mania: A catalog full of media earnings is due this week including reports from Altice, Paramount, Discovery, Sinclair Broadcast Group, Tribune Publishing, News Corp., AMC Entertainment, Gannett, McClatchy, E.W. Scripps and Walt Disney.

21st Century Fox will also report earnings Wednesday, and investors will be keen to hear the latest on its Disney deal and what the "New Fox" will look like under Lachlan Murdoch. Fox's $70 billion sale of some of its entertainment division to Disney will be completed in the coming weeks. The "New Fox," which will consist of Fox, Fox News and Fox Sports, is attempting to shield itself from cord-cutters and focus on live news and sports. The stock is up 30% for the year.

6. Coming this week:

Monday — Avis Budget Group (CAR), SeaWorld Entertainment (SEAS), Paramount (PGRE), Michael Kors (KORS), and Mylan (MYL) earnings

Tuesday — Eli Lilly and Co. (LLY), 21st Century Fox (FOXA), CVS Health (CVS), Wendy's (WEN), Etsy (ETSY), GoDaddy (GDDY), Zillow Group (ZG), Match Group (MTCH), Overstock (OSTK) earnings; US midterm elections

Wednesday — Monster Beverage (MNST), Sinclair Broadcast Group (SBGI), Hostess Brands (TWNK), Tribune Publishing (TPCO), News Corp. (NWSA), Groupon (GRPN), Humana (HUM), Qualcomm (QCOM), TripAdvisor (TRIP), Roku Inc. (ROKU), IAC (IAC), Wynn Resorts (WYNN) earnings; FOMC meeting

Thursday — AMC Entertainment (AMC), Activision Blizzard (ATVI), Crocs (CROX), Gannett (GCI), Walt Disney (DIS), Party City (PRTY), Discovery (DISCA), Dropbox (DBX), Hertz Global Holdings (HTZ), Yelp (YELP), FOMC meeting

Friday — E.W. Scripps Co. (SSP), McClatchy (MNI) earnings; consumer sentiment