Our Canada reporter on Wednesday recommended an article from the Toronto Globe and Mail “ by the ever- thoughtful David Rosenberg - a Canadian national treasure!” It addresses the mystery of why oil prices and stocks are falling in tandem. Here are extracts from Rosenberg's article:

Many a pundit [says] the slide in oil prices is negative for the global economy. The action in the stock market, after all, rallied all the way from the early-2009 lows in oil up to the mid-2014 highs. There seems to be a tight positive correlation now between oil and the stock market whereas in the past the relationship was inverse. [I]n past cycles, lower oil prices were a bullish factor for equities. [N]ow the action in the stock market has led many to believe that a recession is around the corner.

The link between oil and the stock market is actually less about fundamentals and more about fund flows – specifically the activity of global sovereign wealth funds. At last count, there were seven oil-dependent countries that control nearly $4-trillion (US) of assets, 54% of the global tally. These wealth funds channelled their petrodollars across the world’s equity markets during the bull run in oil, why there was a tight positive link between crude and stock prices.

This movie is now running backward. Those who claim that 'break-even' price levels on Middle East oil are in single digits only look at covering direct production costs and ignore fiscal break-even levels. As per the International Monetary Fund, the fiscal break-even oil price for Saudi Arabia is nearly $96 a barrel (hence a 20% deficit-to-GDP ratio); $68 a barrel for the United Arab Emirates (deficit of 4% of GDP); and $58 a barrel for Qatar (budget gap of 1.5% of GDP).

Estimates [say that], as of the end of 2015, 56% of the assets [of] sovereign wealth funds came from the oil and gas related projects. [A]nd up to 10% of the total money invested was in global markets. [Now] many governments, in the Gulf, Africa, and Asia, have to draw down reserves to cover their gaping fiscal deficits.

The Saudi Arabian Monetary Agency (the kingdom’s investment arm) has withdrawn in the order of $70-bn from external managers in just the past six months to meet social spending requirements. Qatar, Kazakhstan and Norway are in similar predicaments. Norway (the largest sovereign wealth fund in the world) reportedly has shed $1.1-bn of its equity holdings ($58.5-bn in total). Abu Dhabi cut $300-mn from its $3.6-bn exposure to U.S. equities.

So the stock market is telling us nothing about the economic outlook; rather, the sudden sell-off in the past two months represented one giant margin call as the petrodollars deployed into equities during good times are reversed. Oil-reliant governments around the world draw down sovereign wealth fund assets to finance their budgetary shortfalls and support their fledgling economies. [T]he equity market decline is really telling us more about the run-off at sovereign wealth funds than anything nefarious about the economy, especially the US economy.”

David Rosenberg is chief economist at Gluskin Sheff & Associates and writes a daily economic newsletter Breakfast with Dave. (Source: TheGlobeandMail.com)

Another take on oil price trends from Bloomberg which cites Goldman Sachs forecasts of a sharp 7% drop in US shale output during 2016, 620,000 barrels/day.

The US recently has produced about 9.4 mn bbls/d, according to the International Energy Authority which separately predicts that non-Opec oil supply will drop by 600,000 bbls/d this year.

The head of Opec, Abdalla El-Badri expects that output from non-members will fall by 660,000 bbls/d. Forecasters seem to agree that shortages will lead to oil prices rising sharply in H2.

Industry experts concur. In a Bloomberg TV interview yesterday BP plc (BP) CEO Bob Dudley said: “We will see higher prices” with “supply and demand tightening in the second half” after a “tough and choppy” first half with a surplus of oil.

Bloomberg worked out that oversupply caused a 30% drop in West Texas Intermediate and a 35% decline in Brent crude, the two world petroleum benchmark prices. It quotes an interview with Dominic Schnider, head of commodities at Hong Kong's UBS unit: “we need to see supply giving up and I thank that falls to the US.” A rise of 30-35% will take oil prices to $40+/bbl.

Moreover, it is not just US shale that will be shut-in or delayed. Other oil producers also will cut production. Russian oil output may fall by 150,000 bbls/d or 1.3%, according to Sanford Bernstein analysts. Iraq, without forecasting output, predicts that oil will hit $50/bbl this year and the United Arab Emirates also expects less oil glut. (Source: Bloomberg.)

The argument for going global is not just about lower US shale output. The head of the NY Fed, Bill Dudley, is talking down the greenback. It has reversed course upward against sterling, the euro, and even the negative-interest-bearing yen. Our dollar was down 1.44% on Wednesday against the Canadian loony.

The big news at 2:24 pm Wednesday is that after a whole week my phones are up and running again in mid-Manhattan in the 21^st century. I just got called by the monopoly owner of the line, Verizon. Now they will not stop telephoning me to tell me how they got the line back, so far 3x. Blog goes out before I pick up the phone again.