Lower crude produces winners & losers

December 17, 2014 03:27 AM

Effects of Falling Oil Prices

What is the impact of falling oil prices? For many it is a simple answer, gasoline is less expensive leaving money in my pocket to be spent elsewhere,  last Thursday’s  much better than expected Retails Sales report went a long way to confirm this. This past week we also saw the realities of the negative effects, companies related to energy production saw their stock prices fall. On a bigger scale entire countries have seen their economic GDP estimates raised or lowered. On a long-term Global Macro view deflation is a concern but the consensus does seem to be positive with the idea lower prices will spur growth. How deep prices go and how long they stay low is difficult to factor in.

For the U.S. consumer the economic boost provided by lower gasoline costs is hitting at the perfect time. The Federal Reserve just ended their extensive QE stimulus program at the end of October with hope the economy could stand on its own. Conservative estimates have the average consumer saving $380 over the next year; Goldman put a number of $125 billion being saved. Unlike with the Fed’s policy, the economic effects are being felt quickly as money saved at the pump is being spent quickly. What I find very interesting is that lower income households are feeling the biggest impact because a bigger percentage of their income is spent on energy. It is also cited that rural areas that have lagged in the economic recovery up to this point are seeing a quicker pick up as well; they are more dependent on driving. This week’s Retail Sales report showed just how fast the economic effects are improving by beating estimates on all components.

To see negative effects just look at the performance of equities related to energy producing companies. Or on a bigger scale equity and currencies of individual countries whose economic strength is pegged to energy production. The cost of drilling for oil differs greatly around the world depending on what drilling method or how difficult it is to extract and with prices dropping so are profit margins. As prices drop, the different breakeven levels become relevant. In some countries the whole social system is funded by the proceeds of oil production. This brings us to the political ramifications of falling prices. Russia who traditionally is one of the world’s largest exporter of oil is already under the pressure of economic sanctions from Europe and the United States caused by invading the Ukraine are now forced to deal with the added pressure of falling oil prices.

In Canada, the proceeds from their oil sands fields have been contributed greatly to their economic strength. As oil prices fell this week those proceeds came under question putting added pressure on their currency and their equity indexes.

Trading Crude, Brent or RBOB has provide plenty of opportunity but to take it a step further consider trading other markets that are affected, and express your market sentiment.

As an example I have included a chart with the Canada’s SP TSX60  and the S&P Index that shows the strength in the TSX60 Index leading the S&P higher early in the year followed by the TSX60 turning bearish as oil prices started to gain momentum to the downside after OPEC’s announcement to not cut supply. 

Key: E-mini S&P H2015 in Black (CME) and S&P TSX60 H2015 in Red (Montreal Futures Exchange).

Source: Barchart 

Outlooks and opinions included are those of the author and not necessarily RCM

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