CRUDE OIL AND THE ECONOMY
Companies without price protection in 2016 could be forced to cut back further on new drilling if prices remain below their break-even costs.
“I think it’s a fair assessment that just about nobody is putting on hedges at this point,” said Jason Wangler, an analyst at Wunderlich Securities. “Why lock in the bottom?”
The drop in later-dated prices surprised some analysts and investors. Oil trader Andrew Hall, who is known for making long-term bullish oil bets, wrote in an investor letter dated Aug. 3 that he didn’t foresee the “pessimism” in the oil market. Mr. Hall’s $2.8 billion hedge-fund firm Astenbeck Capital Management LLC fell 16.6% in July.
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"A large part of the current inflation is temporary. It has to do with the decline in the price of oil; it has to do with the decline in the price of raw materials," he said. "We are in a situation with … nearly full employment but very low inflation."
Fischer was careful not to give any solid indication as to when he believed the Fed would hike rates.
The glimmer of hope comes after Friday's U.S. jobs report quashed confidence the Federal Reserve might delay an interest rate hike until 2016. Not only did the U.S. economy see another month of job gains above 200,000, but any weakness in earnings looked to have abated as well. Stocks sold off on fears that the jobs report had set the stage for a rate hike as soon as next month.
Crude oil bounced back from levels that hit a four-month low last week. West Texas Intermediate crude closed 2.5% lower to $44.96 a barrel as the dollar fell on speculation about when the Fed might raise rates. Oil prices have been under pressure on signs of extended weakness in the Chinese economy, the world's second-largest, and fears that Iran will soon have the green light to add its production to already-oversupplied markets. Oil prices lost 6.9% last week.
Major oilers Exxon Mobil (XOM), Chevron (CVX), PetroChina (PTR) and BP (BP) also moved higher, while the Energy Select Sector SPDR ETF (XLE) spiked 2.6%.
The U.S. dollar dropped against other major currencies, down 0.4% against the euro, 0.65% against the British pound, and 0.9% against the Canadian dollar. The dollar, considered a safe-haven asset, fell as equities looked more profitable in the face of a potentially extended period of near-zero interest rates.
Billionaire Warren Buffett's Berkshire Hathaway (BRK.A - Get Report) (BRK.B - Get Report) was also moving markets after it agreed to buy Precision Castparts (PCP), a manufacturer of aircraft components, one of its biggest deals ever. The deal is valued at $37.2 billion, with Berkshire offering $235 a share, a 21% premium to Precision's Friday close. Berkshire is one of Precision's largest shareholders with a stake of around 3%. Precision shares were jumping by 19.3%.
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