One of the most important 'laws' of the resource sector... Oil production is still soaring while prices fall... Why this bust could be more extreme than usual... How this game of 'chicken' will end... Disturbing news from the IRS... How to protect yourself and sleep well at night...
Today, we continue our look at the crash in oil prices...
Since hitting a high of around $107 per barrel in mid-2014, the price of West Texas Intermediate crude oil ("WTI") – the U.S. benchmark – fell as low as $42.41 in March before recovering temporarily this spring.
As we noted yesterday, prices began falling again last month and hit a new six-year low of $41.35 on Monday. Brent crude oil – the global benchmark – usually trades at a premium to WTI (currently about $5 per barrel higher), but it has suffered a similar decline.
To understand why oil prices are falling – and what could be coming next – investors need to know one of the most important "laws" of the resource sector: Resources are cyclical.
They go through huge "booms" that are always followed by huge "busts," and vice versa. The reasons aren't complicated, but they're critical to understand...
Like all markets, resource markets are driven by supply and demand. As you likely know, when supply and demand get "out of whack," the market reacts and corrects the imbalance.
In its simplest form, if supply of a particular product drops compared with demand, prices will rise. This will lead to an increase in supply – as higher prices encourage more production and attract new producers to the market – and bring supply and demand back into balance.
It works the other way as well...
If supply soars compared with demand, prices will drop. This will lead to a decrease in supply – causing less production and some producers to leave the market – bringing both into balance again.
In most markets, supply and demand are brought into balance relatively quickly... and prices are relatively stable. But the resource markets are different...
When supply and demand get imbalanced, it often takes longer for resource markets to react.
As our friend Rick Rule says, resource markets tend to be both capital- and time-intensive. In other words, it usually takes a lot of time and money to build a mine or drill a well to bring new supply to the market. And once a producer has spent years and millions (or even billions) of dollars building that mine or drilling that well, it may be hesitant to slow or stop production when prices start falling.
This allows imbalances in supply and demand in resource markets to get much bigger... and creates huge price swings with extreme highs and lows you don't see in most other markets. (You can read more about the resource market's cyclicality in the Stansberry Research Education Center right here.)
The recent crash in oil prices is exactly what we expect to see in "boom and bust" resource markets...
Global oil demand is growing at its fastest rate in five years. But oil supply still dwarfs demand. And supply is still growing, too.
Prices are falling, as expected. But while lower prices should eventually lead to lower production, that's not happening yet.
As we mentioned yesterday, members of the Organization of the Petroleum Exporting Countries ("OPEC") and producers here in the U.S. are maintaining, or even increasing, their production.
This alone isn't unusual... But there are reasons to believe this bust may be even more extreme than usual.
Beyond the normal delay between falling prices and decreased production, there are now some unusual "incentives" at play – both for OPEC and U.S. shale-oil producers – that could keep production high much longer than expected... meaning prices could fall even further than expected.
We'll conclude with a closer look at those reasons – and what they could mean for energy investors – in tomorrow's Digest.
Changing gears, if you've used a credit card to purchase something in the past few years, there's a serious chance that your identity has been stolen...
In the past two years alone, hackers gained access to 40 million credit-card numbers from retail giant Target... nearly 60 million credit-card numbers from home-improvement store Home Depot... and nearly 80 million records – including Social Security numbers, dates of birth, addresses, and more – from health insurer Anthem.
In May, hackers broke into computers at the IRS, stealing tax information from hundreds of thousands of people. As we explained in the May 28 Digest...
According to an IRS statement, criminals used stolen taxpayer-specific information – including Social Security numbers, dates of birth, and home addresses – acquired from "non-IRS sources" to gain access to the IRS' online "Get Transcript" service.
Get Transcript allows taxpayers to access prior-year tax returns and other information. It's believed the hackers intended to use this information to file fraudulent tax returns and collect taxpayer refunds next year.
The IRS says the hackers made 200,000 total attempts to gain access to the service, successfully accessing the accounts of approximately 100,000 taxpayers. The agency said it has temporarily shut down online access to the Get Transcript service until it "makes modifications and further strengthens security for it." Taxpayers who need copies of prior-year tax returns can still request them by mail.
The IRS says it will be sending out letters this week to notify all 200,000 taxpayers whose accounts had attempted unauthorized access. It will also be offering free credit monitoring to the 100,000 individuals whose accounts were hacked.
Yesterday, the IRS announced that the final number of people who may have had their data stolen was actually 334,000 – more than triple the number the agency had originally reported.
The IRS believes the hackers are part of a group operating out of Russia. An article from the Associated Press noted that it wouldn't be the first time hackers from overseas had taken advantage of the IRS...
In 2012, the IRS sent a total of 655 tax refunds to a single address in Lithuania, and 343 refunds went to a lone address in Shanghai, according to a report by the agency's inspector general. The IRS has since added safeguards to prevent similar schemes, but the criminals are innovating as well.
An article on financial news website MarketWatch explained that the hackers gained access to these records by successfully guessing people's personal-verification security questions...
Clearly, the answers to those questions were not only known to those taxpayers. Google researchers recently released a white paper reaching that conclusion as well. They studied hundreds of millions of secret answers and account recovery claims and found that while secret questions seem like a great idea, in practice, they fail. People choose questions with obvious answers, or the questions are so difficult that the user doesn't recall the response at all.
"Many personal knowledge questions have common answers shared by many in the user population which an adversary might successfully guess," the paper says. For 16% of questions, the answers were listed in social-networking profiles. Others were easily found in public records, and some questions had few plausible answers in the first place.
Our colleague Dr. David "Doc" Eifrig has been urging readers to improve their online security for years. In fact, he explained how to improve your security verification – which likely would have protected folks from this IRS hack – in the December 24, 2012 DailyWealth.
But the most important takeaway from this story – and the many others like it – extends far beyond identity theft...
Over the past dozen years, the U.S. government has increased its efforts to "protect" its citizens. It created the Department of Homeland Security and various other agencies that exist to fight both physical terrorism and cyberterrorism.
But despite the billions of taxpayer dollars spent – and the growing concerns over intrusions into our privacy – incidents like these show you can't rely on the government to protect you or your family from the real threats of today's modern world.
That's one of the reasons Doc felt compelled to write The Doctor's Protocol Field Manual. Whether it's protecting your "digital life"... exiting a burning building... enduring an extended power outage... moving some assets offshore... or any number of possible adversities you're likely to face today, this book will give you the tools you need to protect the wellbeing of you and your family.
Doc says readers who follow these simple guidelines will gain a level of confidence and security most folks can only dream about. Click here for more details and learn how you can claim a copy today for just $13 plus shipping.
New 52-week highs (as of 8/17/15): American Financial Group (AFG), Activision Blizzard (ATVI), iShares U.S. Insurance Fund (IAK), iShares U.S. Home Construction Fund (ITB), Prestige Brands Holdings (PBH), Constellation Brands (STZ), W.R. Berkley (WRB), and SPDR S&P Homebuilders Fund (XHB).
Kim Iskyan fields a subscriber's question about Greece and the European economy in the mailbag. What's on your mind? Let us know at feedback@stansberryresearch.com.
"If Tsipras had kept his word and gone for a Grexit, things would have gotten a lot worse. One estimate suggested that Greece's economic output would fall 8%, and inflation would shoot up 35%. Outside of the euro, Greece would have turned into an economic basket case like Argentina or Zimbabwe."
"If Greece had left the European economy, it would only be a matter of time before another financially troubled EU country (Portugal, Italy, or Spain?) would also bail... with dire consequences for the European economy."
"The above quotes are from the Digest. Why do you say it would only be a matter of time, etc. If the results would be as bad as you say they would be, why would another onlooking country opt for the same kind of results. It seems like just the opposite would be true. Onlookers would be discouraged from leaving the fold. Enlighten me." – Paid-up subscriber Leo Burghoffer
Kim Iskyan response: It's a good question. It would be more a matter of another country being pushed rather than deciding to leave. Other troubled EU countries might re-emphasize their efforts to stay in the EU's good graces. But what if, after dumping Greece, the EU realized it should have cleaned house a long time ago? After all, once you break one dish, it's not as big of a deal when you break a second.
And what if ditching Greece turned out to be a great thing for the EU? Sure, there would be a big financial cost, and yes, and the political fallout would be enormous. But imagine how much time and energy could be rerouted to things that actually matter, rather than a country that proved many times that it wasn't fiscally responsible? Plus, the EU could stop bailing Greece out.
So while onlookers might be discouraged, they might not have a choice if Greece getting the boot ends up being a positive move for the EU.
Regards,
Justin Brill
Baltimore, Maryland
August 18, 2015
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