Oil Experiences Steepest Selloff Since 2012

The stock market enjoyed a small relief rally yesterday but there was no reprieve for oil prices. Brent crude slumped 4.4% to $85.02 per barrel, the lowest level since 2010; the global benchmark is down 22% year-to-date. Meanwhile, West Texas Intermediate slumped 4.6.% to $81.79, the lowest level since 2012.

Today's decline appears to have been triggered by the International Energy Agency's cutting its demand forecasts for 2014 and 2015 by 200,000 and 300,000 barrels per day, respectively. The IEA cited both supply and demand factors in lowering its estimates, a nod to the deadly combination (for energy prices) of increased global production during a time of decelerating global growth.

Furthermore, the energy watchdog says "most [production] remains profitable at $80 a barrel Brent," suggesting "further oil price drops would likely be needed for supply to take a hit – or for demand growth to get a lift."

This is good news for pretty much everyone other than energy producers and their shareholders. One proxy of energy stocks, the Energy Select SPDR ETF, is down more than 15% in the past three months, more than triple the S&P 500's decline in the same timeframe. Weakness in energy stocks like Chevron and ConocoPhillips weighed on the S&P 500, which finished well off the morning highs.

For consumers, this means the recent decline in gasoline prices is likely to continue. The U.S. average price for a gallon of gas is currently $3.18, according to Gas Buddy; but average prices in 9 states are already below $3 and experts predict the national average will soon follow suit. Prices are falling so fast that "gas price wars" are breaking out in parts of Massachusetts, The Boston Globe reports.

Gasoline as a share of Americans' disposable income has fallen in recent years, thanks largely to more fuel-efficient vehicles, telecommuting, urbanization and other macro factors. Gas as a percent of median income is current 3.73%, up from around 2% in the late 1990s-early 2000s, but down from over 6% in 1980, according to GAMCO.

Given stagnant wages and rising costs for other staples -- most notably housing, healthcare, education and childcare -- any savings due to lower gas prices will be most welcomed by cash-strapped American households. Every 10-cent drop in the price of gasoline translates into $120 of annual savings for the average American household, The NYT reports.

One critical backstory to all this is the apparent split within OPEC, which is still responsible for about one third of global production. Saudi Arabia has pledged to keep production levels high and recently cut prices to European and Asian buyers, despite the recent decline in prices. Kuwait, Iraq, Iran and the UAE have followed the Saudis' lead while Venezuela is calling for a special meeting to discuss prices and Iran is calling for production cuts, The Times reports.

A few theories here to explain the thinking behind what the Arab producers are doing:

• Taking the long view, the Saudis are trying to crimp America's fracking revolution by driving prices down to where it becomes uneconomical for many producers. Some experts said production would slow after WTI broke $90 but The Times says "companies that have led the boom in drilling across North Dakota and Texas are insulated from the declines for the time being, with the break-even levels for investments around $60 a barrel."
• America and the Saudis have a common enemy in the Islamic State, aka ISIS. In exchange for American military support against ISIS, the Obama administration got Arab oil producers to promise to keep production high and prices low. In addition to helping U.S. consumers, this has the added benefit of putting additional pressure on Vladimir Putin's regime, which is overwhelmingly reliant on energy.

No one can really prove (or disprove) either of those theories, but they make intuitive sense. If nothing else, it is hoped that the White House is smart enough to see both the near-term rewards and long-term risks of "playing ball" with the Saudis.

Silver Prices Poised for Rebound

Prices have slid far more steeply for silver than for gold this year, leaving it at the cheapest versus the yellow metal in five years and spurring analysts to anticipate a rebound.

Both metals have fallen as the U.S. economy has improved, pushing up the dollar and eroding appetite for haven assets such as gold and silver, which provide no yield. But silver has fared far worse.

Yesterday, it was trading at about $17.40, close to a four-year low. Gold is near this year’s low, and at near $1,218 was equivalent to 70 times more than silver. That ratio is the highest since July 2009 and compares to a level of about 60 at the start of the year.

The unusual price divergence is catching the market’s attention and spurring sales of silver coins in Australia to retail buyers.

“Silver is oversold and gold is relatively stronger, so silver becomes cheaper,” said Gnanasekar Thiagarajan, a director with India’s Commtrendz Risk Managment.

Silver has various industrial uses, including as a component for mobile phones, meaning demand may pick up as the U.S. economy rebounds. Gold is mainly used in jewelry and cherished as a storehouse of value.

“Markets don’t see great potential for gold,” said Mr. Thiagarajan. An improving U.S. economy has raised expectations that the Federal Reserve will raise interest rates. That would increase yields on Treasury debt—cutting into demand for gold—and boost the dollar.

Gold tends to fall when the greenback rises because the metal is traded in dollars. A rising dollar makes gold more costly for holders of other currencies.

Despite the potential for increased industrial demand for silver, not everyone is convinced about the prospects for a rebound. Standard Bank analyst Walter de Wet said demand is weak and is more likely to fall further than to rise. He said any rallies will be short lived, as speculators place bets that the price will fall further.

But a change in investors’ view has started showing up in statistics on sales of silver coins from Australia’s Perth Mint. Sales have risen in recent months, underpinned by the low prices and the annual release of new coins by the mint. It sold nearly 757,000 ounces of silver coins last month, and 819,000 ounces in August, double what it had been selling a few months earlier.

“The prices are low and, while there’s still not a lot of confidence in the market, coins sales have been doing particularly well,” said Ron Currie, director of sales and marketing.

The mint expects to have sold out of one type of silver coin—a limited edition of 300,000 one-ounce coins commemorating the lunar year of the goat, released for the first time last month—by the end of the week, Mr. Currie said.

Coin investors and collectors tend to be individual buyers, and are usually among the first to jump back into the markets to take advantage of what they see as bargain prices after a slump, analysts say.

The low prices have also encouraged bargain hunters to buy into silver exchange-traded funds. The total of holdings of all silver ETFS is near an all-time high, while ETFs’ holdings of gold have declined, said Mike McGlone, director of research at U.S.-based ETF Securities.