Despite glowing predictions of future globalneeds, most basic commodities are caught in the web of a current supply/demand inversion that has driven prices down to multi-year lows.
This expanding glut has encompassed fossil fuels (coal, oil and natural gas), plus copper, lumber, iron ore, rare metals and even most agricultural products.
While major demand inversion in China for the first time in 25 years as well as greater worldwide production and productivity are to blame, nothing approaches this longer-than-expected price-tumbling malady more than natural gas.
Despite the fact the future outlook of natural gas has ensconced the United States as the world’s No. 1 provider, supply still is outpacing demand but potentially gaining future volume through replacement of coal in power generation, as well as conversion to liquid natural gas for global export, and as a major utilization factor by the domestic chemical industry.
However, the growing glut, which continues to put downward price pressure on basic commodities as a whole, will not find major relief even in the intermediate term spanning the next several quarters.
The deflated gigantic purchasing power of China’s disproportionate buying in the past two decades has left a gaping hole in the supply/demand relationship that is providing an oversupply in most commodities. This continues to be manifested despite attempts by producers to curb supply creation to bring prices back into a better-than-breakeven position.
While the increasingly inflammatory geopolitical situation in the Middle East bodes well for rising oil prices due to OPEC’s waking up to reality, this will not ease the ongoing glut of the overwhelming availability that had been developed by the previous appetite of China’s anticipated massive orders.
While oil producers Russia and Iran likely will gain by prices rebounding back to the $60-$70 per-barrel range by mid-2016, most other previously mentioned commodities will not see the light of profitable levels during the first half of 2016, if then.
In late September, the world was stunned by the lightning-fast intrusion of Russian military power into Syria as well as the expansion of Moscow’s naval presence by widening its sole ownership of the Syrian naval base at Latakia.
While the United States and the U.N. countered with mild protests, the rationale behind this unexpected intrusion is primarily economic. A chain of consequences started with a Nov. 25, 2014 OPEC meeting at which Saudi Arabia was expected to cut production to halt the then slide of oil prices into the low $70s per barrel. Instead, Saudi Arabia increased production, claiming the need for protection of OPEC markets against America’s rapid fracking shale production expansion.
This stunning announcement caused a speedup in pricing decline to the low $40s per barrel by the end of the year. Despite a temporary return to the $60 per-barrel price in the first quarter of 2015, this 60% drop from the $100 high of both America’s light West Texas Intermediate and the heavier universal Brent crude solidified at the mid-$40s by the end of 2015’s third quarter.
But from this obvious Saudi rejection of OPEC’s previous use of production cuts to protect higher prices emanated a crushing blow to other major global oil producers — Russia, Iran, Iraq and Venezuela. The first two have been hard-hit especially as their respective expenditure budgets were based on a $100 per-barrel minimum.
This unitary thrust by the Saudis enraged both Iran and Iraq, already under Tehran’s mutually Shia grip, as well as Russia, which was facing an increasing budgetary deficit as 2015 wore on. This instigated a dialogue between Moscow and Tehran, already knee-deep into its domination of both Iraq and Syria. With Iran hard-pressed by sanctions and an iffy “anti-nuclear” deal with the U.S. and European allies, unpublicized discussions between Russia and Tehran resulted in a broad mutuality of purpose. This has consummated in a political as well as military agreement that has positioned Russia into an unanticipated power position in the Middle East.
With Russian troops, naval and air forces, as well as the latest armaments at the core of Moscow’s military power, the shots are increasingly called by President Vladimir Putin. The ultimate showdown, when it comes, is squarely aimed at the Saudis, who are experiencing budgetary problems due to their increasing domestic expenditures as well as losing the decades-long automatic protection by the U.S., which had always been a one-way street.
While these suddenly dramatic circumstances are increasingly in play, it is obvious Russia’s centrality in future global oil industry decisions and the embattled status of Saudi Arabia are sure to make headlines as the 2016 universal economy awaits.
Mergers and acquisitions at legendary levels
The coup that was Dell’s $67 billion acquisition of technology giant EMC in October was followed shortly thereafter by alcohol super conglomerate Anheuser-Busch embracing SABMiller plc in a bid well upward of $100 billion.
This trend toward previously undreamed of super-size offerings has changed the face of American industry from a combination of unrelated sectors toward focusing on ever-larger size in core businesses in which the lead companies already have attained a dominant position. This concentration of even greater dominance has brought on legendary mergers and acquisition offers that had only previously ranged into the low billions in the mid-1990s.
This year, the mergers and acquisitions craze on a global scale likely will reach $4 trillion. This will eclipse the previous record of $3.66 trillion reached in 2007, notes research firm Mergermarket. By late October, there had been a record 48 mega-deals totaling $1.35 trillion. According to Dealogic, this topped the previous record of 40 deals totaling $1.17 trillion set in 1999.
As might be expected, these record successful offers have been especially centered in the upwardly surging high technology sector. With an already record amount spent to bring centrality to these industry leaders, this seems to be economically justified as the developed world, in particular, is thrusting into increasingly new innovations. These are rapidly creating a new era tantamount to the Industrial Revolution, succeeding the primitive production, transportation and communications prevalent in the late Middle Ages era of the 1700s.
Despite the magnitude of the deals that have been consummated or are in early negotiation stages, these may only be the tip of the iceberg when future historians analyze the technological breakout period of the early 21st century.
On the upside, there has been a global accumulation of monetary liquidity never before experienced in the modern economic world. On the downside stands the ever-increasing numbers of global unemployment, an unattended danger factor that is finding decreasing job opportunities in this rapidly developing “Brave New World.”
Job shortages accelerate
While labor-force participation has touched a low point last reached in the 1960s (62%), it is less well-known that “increased jobs going begging” have reached the highest level since the end of the great financial recession six years ago.
Although ongoing talent-demanding openings have required specific skills to match the needs of America’s expanding technological evolution (recently reaching close to the 10 million mark), the broad construction sector also has opened up in a big way.
While basic contracting skills such as plumbing, heating-cooling installation, plastering, painting and lathering were on the sidelines following the construction reversal in the wake of the great financial recession, a new construction mini-boom has arisen, demanding the job capabilities of thousands.
Surprisingly, single-family home construction is on its way to the previously unexpected 1 million mark this year, driven by population growth and a discernible shift from leasing and renting. This has seen multiple cost increases in the past five years. It also has been abetted by a pickup of foreign investment in selected geographic areas, increasing the market for second homes, as well as for long-term investment purposes.
While the so-called millennials and generation-X members still are wary of getting stuck with a price-decreasing home burden, this has been alleviated by government-backed Fannie Mae and Freddie Mac, which have sanctioned down-payments as low as 3% while historically low mortgage rates continue to attract new job-entry-age participants.
Additionally, an accelerating surge in repair and maintenance seems to have developed into a roaring subsector. This has happened as long-term home improvements as well as upkeep have motivated those middle- and even older-aged owners who want to maintain their property value in addition to taking advantage of solar power, fallback power generation and other updating opportunities.
The increasing shortage of manpower to fill these slots has not yet hampered the construction sector as a whole. However, the simultaneity of residential, commercial and industrial construction due to reach new volume levels in 2016 could make critical job shortages an increasing impediment as the new year unfolds.