Friday, January 16, 2015
The past year has been tough for commodities investors...
Commodities like coal, copper, and uranium have all fallen big. But if oil prices remain low, there could be a lot more pain ahead...
Let me explain...
As regular Growth Stock Wire readers know, crude oil prices have crashed. The price of Brent crude oil is down around 53% in the past year – to around $49 per barrel. And that's bad news for big oil-producing regions... and as I'll show, commodities prices in general.
Take Venezuela, for example. The country is the oil producer's canary in the coal mine. It has the world's largest oil reserves. It relies on oil for 95% of its total exports. And the oil and gas sector accounts for around 25% of the country's gross domestic product (GDP).
So if there's trouble ahead for oil-producing nations, it shows up in Venezuela first.
And that's what we're seeing today...
According to the Wall Street Journal, Venezuela needed crude oil prices to average at least $118 per barrel for it to balance its budget (or "break even") this year.
With oil prices remaining low, the country's economy is now contracting. Venezuela's economy shrank by 2.3% in the third quarter of 2014. And its GDP contracted by 4.9% in the second quarter. Venezuela is now officially in a recession.
If oil prices remain low, things are unlikely to get better for the country. And as I said, Venezuela is just the canary in the coal mine.
At the current oil price, few major oil-producing countries will be able to balance their budgets this year.
The table below shows what major oil-producing countries need oil prices to average this year for their budgets to break even.
As you can see above, these are all major world economies. And if oil prices remain below their average break-even point, most of these economies will soon be in recession (if they aren't already).
That's not good news for anyone. But it's especially news bad for commodities investors.
You see, more countries around the world slipping into recession will affect the consumer goods and building material sectors. For example, heavy-equipment manufacturer Caterpillar Inc. has seen its share price plummet 20% in the past five weeks.
The demand for many commodities used in these sectors will also slow... and prices will fall. We're already seeing this in copper, for example. The price of the metal recently fell to lows not seen since 2009.
The share prices for commodities producers will also fall. For example, the share prices of copper producers Freeport-McMoRan and Southern Copper are down 52% and 22%, respectively, in the past six months.
Commodities investors need to watch this situation closely. If oil prices don't recover and these major world economies go into recession, we could see commodities stocks fall across the board.
Find more of Matt's recent research here:
This Popular Oil Stock Is Headed Lower
"Of all the companies hurting from lower oil prices, few are in more danger than Brazilian oil giant Petrobras."
Silver Soared 420% the Last Time This Happened
"There's a rare extreme setting up in the silver sector right now..."
Why You Should Avoid These Mining Companies Today
"One of the world's most essential commodities is in a terrible bear market. And that has many folks wondering if it's time to buy..."
Biotech continues its long-term uptrend... sector funds XBI and IBB are up 160%-plus over the past three years.
Wheat is getting clobbered... prices are down 12%-plus over the past month.
Target shares jump higher... up more than 25% over the past three months.
Gaming-stock fund BJK sinks 18% in the past two months.