On December 11, 2014, spot WTI closed at $60.01, down sharply from $76.52 the week before that Thanksgiving. In the space of only a few weeks, oil prices had collapsed far more than anyone thought possible; and yet there was very little urgency to the outcome. Economists, in particular, parroted throughout the media, were quick to assert both a supply ‘glut’ as well as how very beneficial low oil prices were in macro terms for consumers. Paradoxically, Janet Yellen’s increasing use of the word ‘transitory’ meant that on one side the decline in oil prices wasn’t meant to last even though on the other that meant the consumer ‘benefit’ would not either. Thus, in orthodox terms it was better that oil prices would return to oppressive levels and therefore any consumer aid was just the silver lining for the interim.
The word ‘transitory’ would define, then, not just oil prices themselves but an entire array of market balances and economic interpretations that come from oil being the economic center of even a services economy. In terms of assets, junk and high yield corporates were uniquely bombarded by the ‘unexpected’ oil crash, leaving many investors to lighten up in what was a great shift in probabilities and perceptions – better to sell a little just in case Yellen got it wrong.
Even though oil fell below $50 spot WTI as soon as January 6, 2015, and then even flirted with the $30′s not long after, by the middle of the year WTI was back above $55 and even intermittently in the very low $60s. For many, far too many, that seemed as if Yellen had it right and that junk bonds were being overly cautious even when the prior year’s selloff (to December 16) was being limited in commentary to just the oil sector. By mid-year, oil and gas were back within the dominant narrative:
This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ November 30, 2015.