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Business/Finance See other Business/Finance Articles Title: Crude Producers and Central Bankers Try to Scare the Bears — Will it Work? Crude Producers and Central Bankers Try to Scare the Bears — Will it Work? Mike Larson | Tuesday, February 16, 2016 at 4:20 pm After getting pummeled for weeks, central bankers and crude producers went on the offense in the past 96 hours. First, European Central Bank President Mario Draghi went before the European Parliament yesterday to proclaim the banking system sound and resilient. He said higher capital buffers and other things made the situation “very different from what it was in 2012" during the eurozone debt crisis. He also said the ECB “will not hesitate to act” further to combat economic weakness when it next meets on March 10. Second, officials from Saudi Arabia and Russia met in Doha, Qatar, and said they would “freeze” oil production. Qatar and Venezuela said they will also join in the new output plan. The Saudi oil minister Ali Al-Naimi claimed the move would help limit “significant gyrations in prices” and lead to a “stable oil price.” Rumors of policy action and short covering ahead of the three-day weekend for U.S. markets helped send the Dow Industrials up by more than 300 points Friday. Then they rose another 220 points or so today. But crude oil gave up all of its gains, suggesting the advance may have trouble sticking. Why? Will oil producers be able to stem the drop in oil prices? Well, let’s start with Draghi. What do you really expect the man to say? Like every central banker, treasury secretary, or finance minister facing a banking crisis in history, he’ll never admit if the system is rotting from beneath. That would only intensify the sell-offs in bank stocks, and even lead to depositor “runs on the bank.” Just remember how former-Federal Reserve Chairman Ben Bernanke and former-Treasury Secretary Hank Paulson kept saying the housing and mortgage crises were “well-contained” back in the mid-2000s — even as they were starting to collapse behind the scenes. They couldn’t admit how bad things were because of the dire consequences of doing so. As for the oil deal, there’s a lot less to it than meets the eye. For starters, both the Saudis and the Russians refused to cut production. They’re only halting further increases … not much of a pledge when you consider both countries are producing at record-high levels. The deal is also conditional on other OPEC and non-OPEC nations joining in. But U.S. share producers aren’t bound by national or government policy. They’ll take advantage of any increase in prices to pump more to keep desperately needed cash coming in the door. Not only that, but Iraq and Iran also aren’t party to the deal. That’s significant because Iraqi production just hit a record 4.35 million barrels per day last month, while Iran is planning to boost production and exports back to pre-sanction levels regardless of what the Saudis or Russians say. “Iraq and Iran also aren’t party to the deal.” Me? I’ll go back to what I’ve been saying for several months. Sharp, short-term rallies are even more common in bear markets than in bull ones. They tend to come after waterfall declines, start because of some policymaker response, and look very enticing on the surface. But unless the underlying fundamentals change significantly for the better, you shouldn’t alter your investing strategy because of them. The better approach is to use them to unload long exposure you’ve been lugging around … or to re-load inverse ETF/put option positions … at better prices. So what do you think? Is Draghi right, and the European banking system in decent shape? Or is he just saying whatever he has to in order to keep investors from panicking further? How about the oil deal? Is this a significant change, or just a bunch of sound and fury signifying nothing? Hit up the comment section and weigh in when you get a minute. Our Readers Speak After several painful sessions for risk assets, we saw a late-day rally on Thursday. That carried through on Friday and in international markets on Monday when we were closed. So what do you see happening from here? Poster Comment: Ain't skeered. Post Comment Private Reply Ignore Thread
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