Over the past week, we continue to see volatility in the markets ahead of next week’s announcement by Janet Yellen regarding Fed policy. Aside from the uncertainty in Fed rates, oil prices and a strong dollar continue to impact the markets.
Oil prices faced another unraveling as the likelihood of rising OPEC production going forward became a focus in the markets, along with strength in the US dollar, solid US production, and a continuing global supply glut.
Figure 1. The Decline in Brent Oil and Crude Oil Prices
Last Friday, OPEC decided to continue pumping oil at its current output level, which in November was 31.695 million barrels per day, the largest monthly level in three years. Yet, OPEC cut its forecast for non-OPEC production in 2016, citing the impact of low oil prices and falling investments in oil. The logic is that low prices may force private oil companies out of business, thus helping OPEC. However, the International Energy Agency has indicated that the world’s stockpile of oil is at a record 3 billion barrels and continues to grow. Crude oil inventories are at levels not seen in at least 80 years.
The citing of this glut is a change in past months where declining oil prices was more a result of a strengthening US dollar. As the dollar strengthens, other currencies clearly decline in value such that holders of those other currencies tend to slow down their purchase of these commodities, causing further declines. Essentially, commodities and currencies spiral downward.
We think that investors should look upon the decline as an attractive entry point to invest in actively managed funds such as those offered here at Nile Capital Management. We expect that, as 2016 progresses and a front runner in the US elections becomes clear, the markets should rebound. Hence, we believe investors should consider taking a long-term approach just as we do and allocate to their positions.
The views expressed are opinions subject to change and are not investment advice
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