While first-quarter commodity prices (oil, copper, steel, natural gas and precious metals) were deeply embroiled in “bearish” territory during 2015’s first four months, a rebound is likely in the making later in the year.
While coincident simultaneity of negative factors had caused a dive in most of the world’s commodity underpinnings, a change in these drab statistics has been poised for a rebound. With current commodity bearishness reflecting on an unusually strong dollar, an overall European recession and a major pause in China’s world-dominant buying power, such a “perfect negative storm” is due for reversal, the strength of which is yet to be determined as the year 2015 progresses.
With anemic March U.S. employment figures weakening the dollar combined with the Eurozone’s trillion-dollar quantitative easing and accelerated demand in Southeast Asia, the second half of the current year harbors the ingredients of an upward rebound.
Although missing from this projection is the uncertainty of major military confrontations in the Middle East, these will only result in quickening higher prices of commodities in general, but oil and gas in particular.
While the furious influx of monetary liquidity flowing into the U.S. from all parts of the world was based on the anticipated strength of a U.S. economy headed for a 3.5% plus in annualized gross domestic product growth, economic realization arrived with the March statistics.
A disproportionate growth in America’s employment and revenue growth during the past year has been engendered by all aspects of energy development. Without this major energy “shot in the arm,” the diminution of the manufacturing sector, haphazard single-family home and commercial construction, and a topped-out export sector hurt by an overvalued dollar, will have brought the U.S. overall economy results to a bare plus over “breakeven” for the year.
While the upward breakout of energy development, especially in the expansion of natural gas — both domestically and export-wise — are still a distinct future possibility, the current “waiting period” will bring the supply/demand balance into a reversal of the commodity “glut.” Expect these developments to result in substantially higher commodity prices before the end of the year.
Hedging price decline losses
With a rash of first-quarter losses verifying the damage wrought on the profit-and-loss statements of many energy-related corporations, it is surprising that a substantial number of stock-listed companies did better than expected.
The reason behind this unexpected improvement was the judicious use of hedging that a number of companies utilized to protect against the drop in prices during the second half of 2014. Although nobody foresaw a crash of more than 50% in both domestic and foreign oil in a relatively short period of time, most of the larger energy corporations, and practically all the master limited partnerships, had “hedged” their positions for 2015 and even thereafter from $80 to $70 a barrel as a low point. This has protected them against the grievous losses that some of the smaller companies that had incurred heavy debts as they came late to the fracking game prior to mid-year 2014. They are now facing grievous financial problems as are some of the regional banks holding that debt.
According to reliable information, some of the middle-sized companies that are heavily dependent on oil and natural gas excavation are using the benefits of their hedge-fund positions to continue paying dividends and funding existing production while awaiting the rebound of oil pricing. This, however, is showing few signs of improvement in the U.S. and abroad any time soon, barring Mideast geopolitical catastrophes.
The majors, such as Exxon Mobil, Conoco Philips and Chevron, continue to maintain reasonable solid positions due to their integrated energy-related activities. These include refining, consumer retail and fees from piping infrastructure, which offset losses incurred in the excavation sector hit by the ongoing global pricing.
Currently those energy corporations disproportionately involved in extraction are showing a slow and almost nonexistent recovery during the first quarter of 2015. Only the extremity of Mideast turbulence could cause a price surge as the current inventory glut continues to outweigh demand by a substantial margin throughout the world.
IPO offerings hit multiyear lows
According to accounting/tax advisory firm Cohn Reznick, initial public offerings have revealed a major first-quarter drop in activity compared to the five years following the official end of the recent great financial recession.
After a number of quarters displaying continued growth, the number of indigenous IPOs dropped 57% year-over-year between the 2014/15 first quarters. The decrease was particularly intensive in the middle-sized independent business world (companies with market capitalization between $10 million and $2 billion).
If the current downward rate persists, the deteriorating tally could cause a loss of more than 140,000 jobs as a result. This dramatic drop in IPO activity, which encompasses individual businesses across the retail, commercial and industrial spectrum, may indicate a trend among middle-market companies to seek capital for financial growth capabilities through institutions other than the public markets
In analyzing the business segments with the greatest diminution of going public through IPOs, the health-care sector stands out. The first quarter of 2015 saw only five companies going public, an 80% drop from the same period in 2014.
But middle-market IPOs continue to comprise a large percentage in 2015 as compared to 2014. More than 94% of IPOs during first quarter 2015 were categorized as middle market, compared to 93% in the first quarter of 2014.
The “life sciences” sector produced the largest number of middle-market IPOs during the first quarter with nine initiated during the first three months of 2015. But for the second year in a row, there were no middle-market IPO starts among the retail sector.
Whether this IPO lull is a temporary expedient influenced by increasing government regulations or other influences, the upcoming two quarters should provide a clarifying indicator.
U.S. manufacturing expansion slowdown
While the technological services supporting the unprecedented expansion of oil production from 3.2 million barrels per day to more than 10 million bpd in the past five years are being substantially cut back, America’s recent vibrant manufacturing sector already is stalling.
While 2015’s first four-month results are putting the precious manufacturing and industrial recovery in reverse, the super-strong dollar is contributing to the slowdown by reducing export opportunities due to the higher prices attendant on goods being shipped abroad.
A tragic set of circumstances has accompanied the rise of the U.S. to the world’s No. 1 position in oil, natural gas and coal production. This has had to be severely cut back due to the severe glut that has overtaken such commodities worldwide.
This U.S. “breakthrough growth” is stalled for now as the European subcontinent as a whole has reached deficit demand rejection, while Southeast Asia, with India, Vietnam, South Korea and Indonesia in the lead, have not yet reached the demand level to offset Europe’s negatives. China, the world growth leader spanning the past two decades, has stalled its previous commodity import levels while absorbing its previously unsustainable growth.
In projecting the impact of this turnaround for the rest of the 2015 second quarter and the final half of the year, this growth reversal has the makings of the year 2015’s overall near $18 trillion gross domestic product growth barely edging up over the 2014 level.
While the retail sector, including automotive purchases, single-family home building and a more vibrant consumer spending level will cushion the shock of the manufacturing and export decline, it likely also will lead to price recoveries in oil, especially, and other commodities. This will happen as the glut starts to evaporate.
It is likely that the end of 2015 will witness a global supply/demand balance and possible selective shortages. Like all economic reversals — either up or down — these changes don’t happen smoothly and thus will cause a raft of recovery reassessment as the year ends.