Friday, January 16, 2015

Oil Begins to Drag Down the Market

The precipitous drop in the price of crude oil (down 57% since July 2014), now $46 a barrel (WTL) is contributing to the high volatility and weak market opening in 2015.

Although the Federal Reserve is optimistic that lower oil prices will spur demand (it’s like a national tax cut worth at least $125 billion to citizens, or up to $550 per family), oil and the American boom in production has also been a stimulus for local economies and major industries in the stock market. The price collapse affects earnings, dividends, investments in new production and, of course, stock valuation.

Along with American consumers, other beneficiaries of cheaper oil are manufacturers, especially car production and most transportation modes. The lower inflation helps allow the Federal Reserve to be “patient” with its plan to raise rates.
  • Fed sees oil price collapse a net benefit, like worldwide tax cut, but significant disruption in major producing nations and for many oil-related industries and stocks.
  • U.S. (12 mbd) and Russia (11 mbd), the two largest producers, with Saudi Arabia (9 mbd) in third (9 million barrels a day (mbd)).
  • Saudi Arabia’s (SA) goal of allowing price to drop is to drive the more expensive new players out of the market (e.g., fracking).
  • U.S./SA relationship important, but not close. They are unhappy with the Redline (Syria) decision and Iran nuclear talks. Organization of Petroleum Exporting Countries (OPEC: Algeria, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, SA, UA Emirates and Venezuela).
Various analysts believe $40 is not necessarily the floor and that the 2015 price average could be less than $60.

Colorado, including the metro area and downtown Denver, will feel the effect in 2015 much sooner than any expected aggregate benefit to the economy from lower pump prices.

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