Ned Davis U.S. SECTOR STRATEGY Davis U.S. SECTOR STRATEGY Research Group PUBLISHED MONTHLY y DECEMBER 18, 2014 Warren Pies, ERP Senior Commodity Analyst John LaForge Commodity Strategist

U.S. SECTOR STRATEGYNed DavisResearch

Group

PUBLISHED MONTHLY y DECEMBER 18, 2014

Warren Pies, ERP Senior Commodity Analyst

John LaForge Commodity Strategist

COMMODITY CORNER FOCUS

Please see important disclosures at the end of this report. www.ndr.com | Periodical | Issue #COMF2014121811

E-mail Us

Commodities Beyond 2014 - Part I

REFERENCED CHART LINKS

BOTTOM LINE

� Commodity super-cycle dying.

� What it means for oil.

KEY COMMODITY PRICES

� Gold . . . . . . . . . . . .$1198.70/oz.

� Copper . . . . . . . . . . . $287.90/lb.

� Oil . . . . . . . . . . . . . $61.87/barrel

� Natural Gas . . . . $3.71/MMbtu

As commodities act out their death roll, I am reminded of one of my all-time favor-ite novels, Shantaram (quote below). It is the true life story, and fate, of Gregory Da-vid Roberts; an educated man who loses his daughter, turns to heroin, is convicted of armed robbery to feed his habit, breaks out of prison, becomes Australia’s Most Wanted man, escapes to India, eventually finding redemption living and working in the slums of Bombay. It is the easiest 900 pages you’ll ever read (no joke).

Today’s publication is also about fate; the predetermined path of the com-modity bull super-cycle, and its future beyond 2014. Yes, we do believe that the commodity bull super-cycle had a fate; has fate. It was sure to die. History tells us so. All cycles eventually end. In the case of commodity bulls, 16 years has been the average, using data back to the year 1800 (chart, grey shaded areas). Commodity bears have averaged just shy of 20 years (average of white areas in chart).

Fate needs accomplices. In the sum-mer of 2012, believing it was better to be too early than too late, we started look-ing for the accomplices (signs of the end). We published The End – Part I, and The End – Part II. Of the signs we found, most were flashing mixed signals. Although some did warn that the end was near, those early signs, in hindsight, looked to be right.

Over the course of two publications, also using a Part I and Part II format, we’re going to review the accomplices, and where they stand. Not every sign is confirming the end; there are some stub-born holdouts. On Page 2 we begin with

the prime assassins of commodity super-cycles: time and success. They sometimes go by the phrase, “high commodity prices cure high commodity prices”.

Part I will set the stage for how com-modity super-cycles die, using oil today as the example. The timing could not be better. OPEC and Russia are showing us in real time how the major actors behave at the end. Between them they control half of daily oil production. Yet, with oil down -47% since June, both have made speech-es claiming that production will not be cut. Does this make economic sense? It does if you are Russia or OPEC, which are over-reliant on the revenue. For the price of oil it is bad, of course. Everyone needs to cut, but no one wants to. These actions are natural consequences of aging super-cycles.

In Part II, early next week, we will target the other signs, and what to do in 2015.

“Fate needs accomplices.”

- Shantaram by Gregory David Roberts

COM10© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Commodities - Secular Bull Markets Monthly Data 1800-12-31 to 2014-11-30 (Log Scale)


Commodities - Secular Bull Markets Monthly Data 1800-12-31 to 2014-11-30 (Log Scale)

1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

112126141158178200224251282316355398447501562631708794891

1,0001,1221,2591,4131,5851,7781,9952,2392,5122,8183,1623,5483,9814,467

112126141158178200224251282316355398447501562631708794891

1,0001,1221,2591,4131,5851,7781,9952,2392,5122,8183,1623,5483,9814,467

NDR Commodity Composite*

Shaded Areas Represent Secular Commodity Bull Markets

*NDR Commodity Composite constructed using prices by George F. Warren & Frank A. Pearson, Bureau of Labor Statistics, Commodity Research Bureau(www.crbtrader.com).

NDR Commodity Composite Performance During Secular Bull Periods

Percentage Gain Length (Years)

1802-1814 Bull 68.5% 12.0

1843-1864 Bull 200.0% 21.4

1896-1920 Bull 267.6% 23.9

1933-1951 Bull 329.9% 18.0

1972-1980 Bull 168.4% 7.9

1999-2011 Bull 270.0% 12.1

Average Bull 217.4% 15.9

mailto:[email protected]

http://www.ndr.com/clients/includedprods.html?product=comf201412181.PDF&includeself=no&type=CHART

http://www.ndr.com/clients/products/DAVIS263.PDF

http://www.ndr.com/clients/products/DAVIS66.PDF

http://www.ndr.com/clients/products/davis260.pdf

http://www.ndr.com/clients/products/davis166.pdf

http://www.ndr.com/invest/products/COMF201206271.pdf



Please see important disclosures at the end of this report.

NED DAVIS RESEARCH GROUP U.S. Sector Strategy: Commodity Corner Focus | DECEMBER 18, 2014

www.ndr.com | Periodical | Issue #COMF2014121812

THE PRIME ACCOMPLICES - TIME & SUCCESS (MOMENTUM)

The stealth assassins of commodity bulls are time and suc-cess. We’ll use the chart below to help explain. The blue line is our commodity composite back to the year 1800. The arrows highlight the ultimate price peaks at the end of each bull super-cycle. The red line in the bottom clip is the 10-year mo mentum of the commodity complex. Notice that the momentum peaks

in the bottom clip match up well with the ultimate price peaks in the top clip. This is our way of showing the common phrase, “high commodity prices cure high commodity prices.” Momen-tum was one of those early signs claiming that the end was near. The momentum of commodity prices has a history of killing its own super-cycles.

Yearly Data 12/31/1800 - 12/31/2013 (Log Scale)

AA965B

Commodity Composite = Wholesale Commodity Price Index from Gold & Prices by George F. Warren & Frank A. Pearson (1800-1932), Producer Price Index for All

Commodities (1933-1945), CRB Spot Index (1946-1955), Reuters Continuous Commodity Index (CCI) (1956-Present). Source: Commodity Research Bureau, www.crbtrader.com425059708398116138163193228269318376445526621734868

425059708398116138163193228269318376445526621734868Commodity Prices Composite

Commodity Prices Since 1800

-5-4-3-2-10123456789101112

-5-4-3-2-1012345678910111210-Year Moving Average of Annual Rate of Change

1800

1805

1810

1815

1820

1825

1830

1835

1840

1845

1850

1855

1860

1865

1870

1875

1880

1885

1890

1895

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

New Chart

Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

PRICE MOMENTUM SAYING THE END IS NEAR

2011




Oil is the most recent victim of time and success. We under-stand the desire to pin the oil drop on someone. But arguing over whether it was the Saudis or Putin, shale or tar sands is wasted breath, we believe. They are but role players in a centuries-old game called How Commodity Super-Cycles Begin, Evolve, & Die. If you re-ally want to ascribe blame – blame oil. Oil killed itself.

Prices run too far, too consistently over a string of years (time and momentum). This invites ever increasing amounts of capital (more wells, debt) - invites ever increasing amounts of competition (frack-ing, shale, LNG, etc.). The bulls drink the “this is going to go on for-ever” KoolAid. More money is raised, more holes are dug; then the cycle stops. The market realizes that too much capital is involved; too much is being produced. Capital starts to be removed, specula-tors get spooked, prices drop, and eventually tank. Most do not get out, though, because they believed in the “this is going to go on forever” mirage. This is where we sit at the end of 2014.

We are now at a point where capital is stuck in the system: land, drilling equipment, mines, debt, people, etc. Much of this is now going to work against the system and will prolong the bear. Capital will exit, but it will exit slowly.

Producers need to cut production, but no one wants to. They have either drank too much of the bull KoolAid, or they can’t afford

to stop producing (Russia, Saudi Arabia etc.) Producers will eventu-ally close mines and shut-in production, but they will do it reluc-tantly. Inevitable price spikes will lead to hope that the bull is back, and production will start coming back; only to send prices lower again. Rinse and repeat. Stuck capital and disbelief will act like a wet blanket over price for many, many years. The average bear market lasts 20 years; the average bull 16 years. Coming back down the slope is painful and frustratingly long.

Recent comments by OPEC and Russia feed this historical pat-tern. Between the two, they control over 50% of the world’s daily production. The price of oil is down -47% in six months. Yet, both said that they would not cut production. Russia said that they had not even considered it. It is the collective, selfish actions over the course of a bull super-cycle that eventually dooms it.

What this means for oil in 2015 and beyond is that prices will enter a long, wide trading range; far below where oil has been the last few years (chart). Once the price of oil finally washed-out from the $30s to $10/barrel in 1986 (thanks to the Saudis), it spent 1986 to 1998 in a persistent $15-25/barrel trading range (spikes due to crisis excluded). Think of today as early 1986 (Page 5); washing-out with a little more downside possible, but probably entering the prolonged trading range.

COMF201205301B_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Oil - Technicals + Sentiment Daily Data 2008-12-31 to 2014-12-17 (Log Scale)


Oil - Technicals + Sentiment Daily Data 2008-12-31 to 2014-12-17 (Log Scale)

2009Jan Apr Jul Oct

2010Jan Apr Jul Oct

2011Jan Apr Jul Oct

2012Jan Apr Jul Oct

2013Jan Apr Jul Oct

2014Jan Apr Jul Oct

2015Jan

38

40

42

45

47

50

53

56

60

63

67

71

75

79

84

89

94

100

106

112

119

126

38

40

42

45

47

50

53

56

60

63

67

71

75

79

84

89

94

100

106

112

119

126Oil - WTI (Perpetual Futures)Periods of Extreme Pessimism (DAVIS260)Periods of Extreme Optimism (DAVIS260)

$90 = Resistance

$73-76 = Old Support...Now Resistance

Sources: Commodity Systems, Inc. www.csidata.com; Ned Davis Research, Inc.

OIL PRICE VACUUM




Don’t think the cycle description is only about oil. Oil is our example today, but we could be using others. Gold saw prices crater $-600/oz. last year. Yet, world gold production gained 5%; one of its largest y/y gains in decades, and a record yearly pro-duction number. It was by far its largest year/year production gain too, since 2001. And 2014 is tracking on-par with 2013.

The amount of gold above ground on a per-person basis in the world now stands at one of the highest levels since 1900

(bottom chart, top clip). Much to the disbelief of gold bugs, the gold market is saturated; another common trait of aging super-cycles.

Yet, gold producers cut reluctantly, or not at all. As commod-ity super-cycles die, producers often do what they need to do to survive, which may or may not be at marginal cost.


Gold Above Ground vs. Global Population Yearly Data 1900-12-31 to 2013-12-31 (Log Scale)


Gold Above Ground vs. Global Population Yearly Data 1900-12-31 to 2013-12-31 (Log Scale)

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

0.49

0.51

0.53

0.55

0.57

0.60

0.62

0.64

0.66

0.69

0.71

0.73

0.75

0.78

0.80

0.49

0.51

0.53

0.55

0.57

0.60

0.62

0.64

0.66

0.69

0.71

0.73

0.75

0.78

0.80

Source: Commodity Systems, Inc. (CSI) www.csidata.com, U.S. Geological Society, Department of the Interior/USGS

Ounces of Gold Per Person Available Worldwide

15.0

17.5

20.0

22.5

25.0

Go

ld G

row

th R

ate

(%

)

50

75

100

125

150

175

Go

ld - T

on

ne

s

Total Gold Above GroundTen-Year Growth Rate

GOLD PER PERSON IN THE WORLD




HOW OIL DIED IN THE 1980s

The oil story today is showing some interesting parallels to the 1980s.

The Russians are not the only ones who don’t want to cut in 2014. OPEC stated last week that next year's demand would be the weakest in eleven years. Yet, they did not cut production, nor did they signal that a cut was coming.

Q: What makes OPEC think they can have their cake (high oil prices) and eat it too (not cut production)?

A: The 1980s.

As the cycle died in the early 1980s, OPEC producers fought hard not to cut oil production. OPEC eventually caved, but its burden was not shared evenly. OPEC members leaned heav-ily on Saudi Arabia to cut more, and they won, allowing their smaller quotas to remain relatively steady. The red line in the chart shows OPEC production (including Saudi Arabia) since 1980. The blue line is production from Saudi Arabia alone. From 1980 to 1985, OPEC cut production 9.8mm b/day; 6.5mm b/day of that was Saudi Arabia. The Saudis went from produc-ing 10.3mm b/day in 1980 to 3.8mm b/day in 1985.

Note the production spike around 1985 as you flip to Page 6.

COMF201412161A_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Crude Oil Production - Saudi Arabia vs. OPEC Yearly Data 1980-12-31 to 2013-12-31

COMF201412161A_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Crude Oil Production - Saudi Arabia vs. OPEC Yearly Data 1980-12-31 to 2013-12-31

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

3.754.004.254.504.755.005.255.505.756.006.256.506.757.007.257.507.758.008.258.508.759.009.259.509.75

10.0010.2510.5010.7511.0011.2511.5011.75

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

Source: U.S. Energy Information Administration

Saudi Arabia - Crude Oil Production - (Left Scale - MMbbl/d)OPEC - Crude Oil Production - (Right Scale - MMbbl/d)

HOW SAUDI ARABIA AND OPEC DEALT WITH

THE 1980s




By 1985, the Saudis had had enough of the OPEC freeloaders, and needed prices to clear. They invoked a strategy of shock and awe by reversing course and jacking-up production. Prices plummeted, which can be seen in the top clip of the chart, near the end of 1985.

After the fact, the strategy was praised a success by many oil producers (countries and companies), as it set an ultimate price

floor. WTI hit a record low of $10.42 on April 7th, 1986, and has not hit a lower price since, not even during the 1998 Russian ru-ble/Thai bhat crisis. The last time WTI printed less than $10.50/barrel was September 1974. So, the Saudi strategy was success-ful in hindsight, but it clearly came with maximum pain.

(JL-I0105)

Daily 7/02/1979 - 1/02/1987 (Log Scale)

Crude Oil(WTI)

Scale Right

1/02/1987 = 18.04

11131517192226303439

S&P 500 Index

Scale Left

1/02/1987 = 246.45

104113123134146159173188205223243

S&P 500 Energy Sector

Scale Right

1/02/1987 = 58.48 293133353740434649525660

S&P 500 Energy Sector / S&P 500 Index

Scale Left

1/02/1987 = 23.73

2122242628303234374043

J S N J1980

M M J S N J1981M M J S N J

1982M M J S N J

1983M M J S N J

1984M M J S N J

1985M M J S N J

1986M M J S N J

1987

Oil S&P 500 Index Energy Stocks Around Last Commodity Peak



.www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

©

1980 COMMODITY SUPER-CYCLE

PEAK1982 STOCK SUPER-CYCLE

BOTTOM

OIL

S&P 500

ENERGY STOCKS

ENERGY STOCKS VS. OTHER STOCKS




DOES OPEC MATTER LIKE IT USED TO, THOUGH?

The answer is, yes it does. The blue area in the top chart shows world oil production. Today, world oil production sits near 90mm barrels/day. The red line is OPEC’s share of that oil production. While it is down some since the start of the shale boom, it is close to all-time highs at 39.5%. What OPEC does with future oil production will impact global oil prices.

It is true, though, that the U.S. is importing less oil from OPEC countries. This is shown in the second clip of the bottom chart. Canada and U.S. shale basins are making up the differ-ence in OPEC imports. But that may change if oil prices stay in the $50s. We are already seeing shale permits being shelved.

The answer makes us con-front another probable “ac-complice” as to why commod-ity bears take so long to clear: producers don’t always have the same motivations.

Companies that produce commodities have stakehold-ers that force them to respond fairly quickly to new economic realities. Countries, on the other hand, are not known for their quick responses. And countries are some of the big-gest commodity producers. They have revenue needs, ar-guably much greater at the end of super-cycles than at the start. Being good stewards of capital often comes second to the final revenue number for countries.


Crude Oil Production - OPEC % Share of Global Production Yearly Data 1980-12-31 to 2013-12-31


Crude Oil Production - OPEC % Share of Global Production Yearly Data 1980-12-31 to 2013-12-31

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

27.528.028.529.029.530.030.531.031.532.032.533.033.534.034.535.035.536.036.537.037.538.038.539.039.540.040.541.041.542.042.5

5859606162636465666768697071727374757677787980818283848586878889909192Source: U.S. Energy Information AdministrationGlobal Crude Oil Production - (Right Scale - MMbbl/d)

OPEC Production as % of Global Production - (Left Scale)

COM3017C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

U.S. Crude Oil Imports - Canada Rising...OPEC Falling Monthly Data 2004-12-31 to 2014-09-30

COM3017C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

U.S. Crude Oil Imports - Canada Rising...OPEC Falling Monthly Data 2004-12-31 to 2014-09-30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

1.50

1.75

2.00

2.25

2.50

2.75

3.00

1.50

1.75

2.00

2.25

2.50

2.75

3.00Canada (Total - MMbbl/day) = 3.13

3.003.253.503.754.004.254.504.755.005.255.505.756.00

3.003.253.503.754.004.254.504.755.005.255.505.756.00OPEC Member Countries (Total - MMbbl/day) = 2.9

1.501.752.002.252.502.753.003.253.503.754.004.25

1.501.752.002.252.502.753.003.253.503.754.004.25Source: U.S. Energy Information AdministrationAll Other Countries (Total - MMbbl/day) = 1.48

OPEC PRODUCTION STILL MATTERS




That does not mean that global investors do not hold countries accountable. They do (they at least try). The chart looks at the currencies of four different oil-producing countries versus the U.S. dollar: Russia, Nigeria, Mexico, and Brazil. The chart starts at the $107/barrel June peak to present. Russia (blue line) has taken it hard, falling in lock-step with the price of oil (black line). Option-adjusted spreads (OAS) of oil-producing countries, as expected, are blowing out too.

Holding countries accountable, however, does not always square with oil’s economic realities. While oil is looking for a clearing price, countries that produce oil are trying to protect their finances. The ruble is collapsing, but cutting oil produc-tion will not necessarily help Russian finances. In fact, it could make matters worse, unless the production cut is coordinated with other key players. What’s best for oil prices is not always best for individual oil producers, and vice versa.

COMF201412161C_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Oil Producing Currency Collapse Daily Data 2014-06-20 to 2014-12-15

COMF201412161C_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Oil Producing Currency Collapse Daily Data 2014-06-20 to 2014-12-15

23Jul '14

02 14 23Aug '14

01 12 21Sep '14

02 11 22Oct '14

01 10 21 30Nov '14

10 19Dec '14

01 1055.0

57.5

60.0

62.5

65.0

67.5

70.0

72.5

75.0

77.5

80.0

82.5

85.0

87.5

90.0

92.5

95.0

97.5

100.0

55.0

57.5

60.0

62.5

65.0

67.5

70.0

72.5

75.0

77.5

80.0

82.5

85.0

87.5

90.0

92.5

95.0

97.5

100.0


RUB/USDMXN/USDNGN/USDBRL/USDCrude Oil (Brent Spot)

OIL PRODUCING CURRENCIES COLLAPSING

http://www.ndr.com/invest/products/BMS_25.pdf




SAUDIS BEHIND THE PRICE SWOON?

The 1980s OPEC story-line is the likely genesis of today’s talk that the Saudis are behind the recent price swoon. The plan being some-thing like: don’t cut produc-tion, maybe even raise pro-duction, watch prices fall, and with it high cost oil production from places like North Dakota. In other words, undercut your competition and watch them fade away.

Some shale oil is coming off-line, but we are skeptical that this was the grand plan of the Saudis. The Saudis need high prices as much as everyone else, probably more than you think. The Saudis are not in the same position that they were in the 1980s. Saudi Arabia has an outsized youth problem on its hands. Nearly 50% of all Saudis are under the age of 25. The chart at right shows Saudi Arabia near Egypt and Iran as those countries facing immi-nent youth bulges.

Youth bulges, combined with high unemployment (plus increasing educational rates, and low and rising in-comes), have a history of stir-ring up trouble. Past revolu-tions were bred from similar circumstances. Some notables include Iran in the late 1970s, South Korea in the mid-1980s, Indonesia in the late 1990s, and Tunisia and Egypt in 2010. To be clear – we are not saying that revolution is at-hand in the Kingdom, just that demo-graphic trends are putting the government in a difficult spot. IE816

© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

Youth Bulge by Country in 2013

Source: U.S. Census Bureau

IE816© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

Youth Bulge by Country in 2013

Source: U.S. Census Bureau

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Percentage

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Percentage

JapanSpain

GreeceItaly

Hong KongGermany

Czech RepublicSingapore

PortugalRussia

HungarySwitzerland

PolandFrance

CanadaSweden

IrelandUnited Kingdom

South KoreaTaiwan

NorwayAustralia

United StatesThailand

ChinaChile

ArgentinaBrazil

TurkeyIndonesia

MalaysiaColombia

MexicoIndia

IranEgypt

PeruSaudi ArabiaSouth Africa

Philippines

Emerging Market Countries

Developed Market Countries

Population Age 15-24 asPercentage of Population Age 15+

SAUDI YOUTH BULGE





Q: What is the “breakeven” oil price that balances rev-enues with spending for Saudi Arabia?

A: North of $80/barrel.

Paul Gamble from Jadwa Investment pre sented his estimates while we were on an oil panel together in Riyadh in 2012. He showed the chart below, which had breakeven prices ranging between $70 and $90/barrel in the coming years. Back in 2012, Paul’s breakeven guesstimate for 2014 was $67/barrel. At the start of 2013, he revised it to $71/barrel. At the start of this year the estimate was again re vised higher to $81/barrel (not reflected in the chart yet by Jadwa Investment). Increased social spending to combat the youth bulge keeps the break-even rising.

Paul also threw out, to an astonished audience, that the breakeven price could be as high as $325/barrel by 2030. The $325/ barrel number was even more startling when we real-ized that slower Saudi oil consumption growth was fac tored into the future estimates.

Now, we don’t know for sure what the breakeven price is in Saudi Arabia. Paul doesn’t either. But we think his firm is on to something. Should $81/barrel be even remotely close to the right break even price, it is a risky proposition for the Saudis to be conspiring against U.S. shale producers or Russia. A better guess at what is going on with oil is the collective actions at the end of super-cycles; high prices cure high prices (no one wants to cut, yet everyone needs to).

COMF201205311F_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Saudi Arabia - Oil Prices vs. Breakeven Prices Daily Data 2002-12-31 to 2032-12-30 (Log Scale)

COMF201205311F_C© Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/

Saudi Arabia - Oil Prices vs. Breakeven Prices Daily Data 2002-12-31 to 2032-12-30 (Log Scale)

2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032

20

22

25

28

32

35

40

45

50

56

63

71

79

89

100

112

126

141

158

178

200

224

251

282

316

355

398

20

22

25

28

32

35

40

45

50

56

63

71

79

89

100

112

126

141

158

178

200

224

251

282

316

355

398Saudi Arabia - Breakeven Oil PriceCrude Oil - Brent

Source: Energy Information Agency, EIA.Concept Courtesy of Jadwa Investment.

OIL PRICE

PROJECTED "BREAKEVEN"

OIL PRICE FOR THE KINGDOM

$325






Q: So how did it end for energy stocks after the Saudis made their shock and awe move in 1985?

A: Not well (relatively).

The chart below is the same chart from Page 6, but it ex-tends from 1979 to 2005. This way, we can see the connection between the price of oil (top clip, blue line) and the relative strength of energy stocks (bottom clip, green line) during the 1980s and 1990s. Even though the ultimate price floor was set in 1986, prices spent most of their time from 1986 to 1998 inside a

$15-$25 range. Energy stocks were not good relative invest-ments until the commodity bear super-cycle ended.

Oil is searching for a clearing price today. However, we are fearful that producers, still selfishly motivated, will remain un-disciplined, another sign of aging super-cycles. With each price rise, the market may find more supply in the market than de-mand, keeping a persistent lid or range on prices. If this is truly the end, don’t expect to see oil north of $100/barrel anytime soon.

SUMMARY

A new commodity bear market has likely started, as of Feb-ruary 2011. The average bear lasts just under 20 years. The implications are grave for commodity prices. For commodity stocks, it does not have to be as dire as long as the stock mar-ket is in a secular bull, which it is. On an absolute basis, com-

modity stocks can still be up during a commodity bear, but they’ll likely struggle on a relative basis.

Next week, in Part II, we’ll list the other signs, where they stand, and what to do.

(JL-I0105A)

Daily 6/30/1980 - 1/02/2003 (Log Scale)

Crude Oil(WTI)

Scale Right

1/02/2003 = 30.12

11131517192226303439

S&P 500 Index

Scale Left

1/02/2003 = 909.03

11915219424731440151065082910561346

S&P 500 Energy Sector

Scale Right

1/02/2003 = 186.80

30364351607184100118140166197233

S&P 500 Energy Sector / S&P 500 Index

Scale Left

1/02/2003 = 20.55

14161820232629333742

1985

1990

1995

2000

Oil S&P 500 Index Energy Stocks Around Last Commodity Peak

Source: S&P Dow Jones Indices, U.S. Energy Information Administration


.www.ndr.com/vendorinfo/. For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

©

1980 COMMODITY SUPER-CYCLE

PEAK

1982 STOCK SUPER-CYCLE

BOTTOM

OIL

S&P 500

ENERGY STOCKS

ENERGY STOCKS VS. OTHER STOCKS

DISCLAIMER

NDRG EDITORIAL BOARD

VENICE600 Bird Bay Drive West Venice, FL 34285(941) 412-2300

BOSTON50 Federal Street2nd FloorBoston, MA 02110(617) 279-4860

ATLANTA2100 RiverEdge ParkwaySuite 750Atlanta, GA 30328(770) 308-1128

SAN FRANCISCO50 California StreetSuite 1500San Francisco, CA 94111(415) 277-5477

LONDONNestor HousePlayhouse YardLondon EC4V 5EX+44 (0)20 7779 8579

NED DAVIS RESEARCH GROUP

sales @ndr.comwww.ndr.com(800) 241-0621

The data and analysis contained herein are provided “as is” and without warranty of any kind, either

expressed or implied. Ned Davis Research, Inc. (NDR), d.b.a. Ned Davis Research Group (NDRG), any NDRG

affi liates or employees, or any third-party data provider, shall not have any liability for any loss sustained

by anyone who has relied on the information contained in any NDRG publication. NDRG disclaims any

and all express or implied warranties, including, but not limited to, any warranties of merchantability,

suitability or fi tness for a particular purpose or use.

NDRG’s past recommendations and model results are not a guarantee of future results. This

communication refl ects our analysts’ opinions as of the date of this communication and will

not necessarily be updated as views or information change. All opinions expressed herein are

subject to change without notice. NDRG or its affi liated companies or their respective shareholders,

directors, offi cers and/or employees, may have long or short positions in the securities discussed

herein and may purchase or sell such securities without notice.

Using any graph, chart, formula or other device to assist in deciding which securities to trade or when to trade

them presents many diffi culties and their eff ectiveness has signifi cant limitations, including that prior patterns

may not repeat themselves continuously or on any particular occasion. In addition, market participants using

such devices can impact the market in a way that changes the eff ectiveness of such device.

Further distribution prohibited without prior permission. For data vendor disclaimers, refer to

www.ndr.com/vendorinfo.

Copyright 2014 (c) Ned Davis Research, Inc. All rights reserved.

Ned DavisSenior Investment Strategist

Tim Hayes, CMTChief Global Investment Strategist

Joseph KalishChief Global Macro Strategist

Lance Stonecypher, CFAChief U.S. Equity Sector Strategist

Ed Clissold, CFAU.S. Market Strategist

Brian Sanborn, CFAGlobal Quantitative Equity Strategist

Neil LeesonETF Strategist

Founded in 1980, Ned Davis Research Group is a leading

independent research fi rm with over 1,100 institutional

clients in over three dozen countries. With a

range of products and services utilizing a 360°

methodology, we deliver award-winning

solutions to the world’s leading investment

management companies. Our clients include

professionals from global investment fi rms,

banks, insurance companies, mutual funds, hedge

funds, pension and endowment funds, and registered

investment advisors.

Generate alpha. Identify risk. Choose Ned Davis Research.

Macro

Sentiment

Fundamental

Technical

Idea

360° APPROACH

Documents

Ned Davis U.S. SECTOR STRATEGY Davis U.S. SECTOR STRATEGY Research Group PUBLISHED MONTHLY y DECEMBER 18, 2014 Warren Pies, ERP Senior Commodity Analyst John LaForge Commodity Strategist