Financial news outlets are full of articles about the best Energy Stocks to buy for 2017. The same publications are also covering the cash outflow from China, Japan flirting with recession again, the UK pulling out of the EU, trouble in the Middle East and a global supply glut of crude oil. The prices or oil and natural gas are down because supply exceeds demand. This situation will not be remedied by less supply because producers need to make money on their investments. Rather for energy stocks to recover there needs to be an increase in demand. Reuters reports that energy and financials are dragging the Dow and S&P 500 down.
Declines in energy and financial stocks weighed on the S&P 500 on Monday and helped stall the Dow’s pursuit of the 20,000 milestone ahead of earnings season and U.S. policy changes under Donald Trump.
Based on the latest available data, the Dow Jones Industrial Average .DJI was down 73.89 points, or 0.37 percent, to 19,889.91, the S&P 500 .SPX lost 7.95 points, or 0.349147 percent, to 2,269.03 and the Nasdaq Composite .IXIC added 10.76 points, or 0.19 percent, to 5,531.82.
Will energy stocks ever recover? For this to happen the world economy needs to perk up. The downside is that the new Trump administration is talking about increasing tariffs which could start a trade war.
Oil and a Trade War
Forbes writes about a possible Trump trade war with China.
China will beat the U.S. in a trade war if president-elect Donald Trump wants one.
The country’s government newspaper, the People’s Daily, reported on Tuesday that unnamed trade officials and economic advisers said the Chinese economy could withstand trade tariffs mainly because exports were no longer a driving factor for growth.
Trump has said he would slap tariffs as high as 35% on certain Chinese goods. China is a member of the World Trade Organization and would likely retaliate against unfair trade practices by the new U.S. government. What is unclear is whether the U.S. under Trump would adhere to WTO rulings on trade disputes.
A greater concern for the USA is if China lets the Yuan float substantially lower making US products unsellable outside of the USA. This sort of trade war would greatly reduce the need for energy for industry and drive energy stocks even lower.
Will the Oil Run Out?
For years skeptics have said that eventually the oil will run out. Along the way the price per barrel will skyrocket, they say. However, today there is more oil available than the world can consume and new extraction methods are increasing our ability to bring more oil to the surface. This drags down the price of oil and hurts energy stocks. Despite common wisdom that the US has used up its reserves, Oil Price notes that the U.S. has the world’s largest oil reserves.
The U.S. holds more oil reserves than anyone else in the world, including Saudi Arabia, Russia, and Venezuela.
That conclusion comes from a new independent estimate from Rystad Energy, a Norwegian consultancy. Rystad estimates that the U.S. holds 264 billion barrels of oil, more than half of which is located in shale.
That total exceeds the 256 billion barrels found in Russia, and the 212 billion barrels located in Saudi Arabia.
Over the long term there is a limit to world oil production.
On a global basis, Rystad estimates that the world has about 2,092 billion barrels of reserves, or about 70 years’ worth of oil at today’s production rate of 30 billion barrels per year. That compares to the 1,300 billion barrels produced around the world in history.
In the end the price of oil will go up but there will be less and less oil to sell. Will energy stocks recover in the meantime? They probably won’t.
