Cheap oil, good for consumers, is slamming stocks. Why?

[webfact]

Cheap oil, good for consumers, is slamming stocks. Why?
By KEN SWEET and DAVID KOENIG

NEW YORK (AP) — Wall Street is drowning in oil.

Stocks are having their worst start to a year in history in part because of a rapid plunge in the price of oil. The price of crude is down 28 percent this year already, which in turn has dragged down energy company shares in the Standard & Poor's 500 index by 13 percent, which has helped pull the overall index down 9 percent.

This even though low oil prices — and the cheap prices for gasoline and other fuels that result — are wonderful for consumers and many companies.

"It seems ironic that in the run-up to the global financial crisis we were worried about oil prices being too high in 2007 and 2008. Now we're worried about them being too low," said Julian Jessop, head of commodities research with London-based researchers Capital Economics Ltd.

The drastic drop in oil and stock prices stands in contrast with a U.S. economy that, on the whole, is doing pretty well. U.S employers created 292,000 jobs in December, and few economists see the economy sliding into recession.

Here's what experts think is going on.

WHY IS OIL SO LOW?

Because there is so much of it.

A long run of high oil prices inspired drillers to develop new techniques and to go to new places to find more oil, and they succeeded. In the U.S. improved oil drilling technologies known generally as fracking have added more oil to the global market than the total production of any other nation in OPEC other than Saudi Arabia.

Producers in the U.S. and abroad haven't cut back production very much, despite the low prices, and now the lifting of international sanctions against Iran could send more oil flowing into markets that are already awash in crude.

U.S. stockpiles are at their highest level in at least 80 years, and the International Energy Agency predicts that during the first half of this year global oil supply could outstrip demand by 1.5 million barrels per day.

Demand for crude has been growing steadily, but that may not last because economic growth in China, the world's second-largest oil consumer after the U.S., is slowing.

WHY DO LOW OIL PRICES HURT THE STOCK MARKET?

Oil company profits are plummeting, so oil company shares are plummeting, and that is dragging down the whole market.

Analysts estimate that profit for all S&P 500 companies in total are on track to be down a recession-like 5.8 percent for 2015. But if energy companies were removed from that figure, S&P 500 profits would be up a very healthy 5.7 percent for the full year.

That profit drop directly leads to lower share prices that drag down entire indexes. Two of the biggest oil companies in the world, Exxon and Chevron, are part of the 30-member Dow Jones industrial average. Of the 20 biggest share price losers in the S&P 500 this year, 13 are energy companies.

Investors are also selling shares of companies that may have exposure to the oil industry, like certain banks. And the price of oil has now fallen so low that investors are also worried that it could mean global economic growth is much weaker than expected, which could hurt all companies.

AREN'T LOWER OIL PRICES A GOOD THING FOR THE ECONOMY?

It depends on why prices are lower.

If they fall because new supplies have been found, it usually helps the broader economy, and markets held up fairly well during oil's big slide from over $100 a barrel in 2014 to under $50 a barrel last year.

"In the long run, lower oil prices should be positive or at worst neutral for the world economy because all they're really doing is transferring income from oil producers to oil consumers," Jessop says.

But this latest plunge in prices to under $30 a barrel has investors worried that oil prices are falling because global growth is slowing, as businesses and consumers in many developing countries, particularly China, cut back on spending. Bruce Kasman, chief economist at JPMorgan Chase, says that steep drops in oil prices have historically been a sign of a weakening global economy.

Also, U.S. consumers have remained cautious about spending the money they aren't putting into their gas tanks, which limits the benefit to the broader economy. Americans saved 5.5 percent of their incomes in November, up nearly a full percentage point from a year earlier.

Kasman estimates that U.S. spending grew at a tepid pace of just 1.5 percent in the final three months of last year. "There's no doubt that the consumer spending growth figures for the U.S., Europe and Japan have disappointed," he said.

Some of that likely reflected a temporary drag from warm weather, as Americans spent less on winter clothing and utilities. That could turn around in the first quarter, giving the economy a lift, Kasman said.

Delta Air Lines told investors this week that bookings for this spring are ahead of last year's pace because cheaper gasoline means consumers have more money.

COULD THIS LEAD TO BROADER TURMOIL, THE WAY THE SUBPRIME MORTGAGE CRISIS DID?

It is already having some ripple effects, but the energy market isn't nearly as big or far-reaching as the housing market.

When oil prices were high, lots of banks, including some of the biggest on Wall Street, made loans to energy companies to finance drilling in North Dakota, Texas and elsewhere. Dealogic estimates that the oil and gas industry has roughly $500 billion in outstanding debt. According to the Federal Reserve, there is $11 trillion in outstanding residential mortgage debt.

Still, some are feeling it. Oil company cash flow is slowing, and companies are finding it harder to repay their loans. Oil and gas company bankruptcies are rising, and the entire market for so-called junk bonds has been shaken as a result of energy company defaults.

JPMorgan Chase, Wells Fargo, Citigroup and Bank of America all had to write down the value of energy loans or set aside more money to cover losses. BofA executives told investors this week that energy loans were roughly 2 percent of its total loans. Smaller regional banks could to be more exposed relatively than the big Wall Street banks.

IS THERE AN OIL PRICE THAT WOULD BE GOOD FOR THE MARKET AND CONSUMERS?

Jessop thinks that a price of about $60 a barrel would do the trick. "High enough to keep the main producers in business but low enough to provide a real boost to the incomes of consumers," he says. He expects prices to return to that level by the end of next year as oil companies pare back exploration and the glut is worked off.

AP Economics Writer Christopher S. Rugaber contributed to this story from Washington. Koenig reported from Dallas.


-- (c) Associated Press 2016-01-21

[mcfish]

Since most expats on TV choose to invest money in the markets rather than property...this will hurt big time

[MaeJoMTB]

Essentially the big boys run and manipulate the markets for their own purposes.

The small investor & consumers will always be the losers.

[tonray]

Low energy prices are a result of the oversupply of oil....But....But....the oversupply has less to do with more supply being brought to market than the fact that demand has waned significantly. This means that global growth has essentially died...from China to Euro zone to America...it is hard to find economies growing at a pace that will support current asset prices (and that includes real property for those who believe they will somehow be spared...if stocks crash...who can afford to buy your real estate at what you paid for it ?).

Stock markets are forward discounting mechanisms and without growth in evidence, the current prices are deemed to high to be sustained. Now some of the volatility is caused by excessive leverage used by large traders (hedge funds and other affiliates) and since they are leveraged they must sell everything quickly to avoid a complete loss and owing more than they have to play with.

[tonray]

Since most expats on TV choose to invest money in the markets rather than property...this will hurt big time

Property will not be spared because the economic potential (rising salaries, rising stock investments) will be diminished thereby also lowering the price at which property will be worth in the market.

[mcfish]

Since most expats on TV choose to invest money in the markets rather than property...this will hurt big time

Property will not be spared because the economic potential (rising salaries, rising stock investments) will be diminished thereby also lowering the price at which property will be worth in the market.

Yes in the USA. The last global meltdown in 2008 had zero impact on Thai property

[ezzra]

In the US airfares are dropping fast, everywhere else, they're still pretty firm,

why with $30 a barrel of crude, airfares are not going down? what kind of

fare's collusions is going on here?

[Usernames]

Low energy prices are a result of the oversupply of oil....But....But....the oversupply has less to do with more supply being brought to market than the fact that demand has waned significantly. This means that global growth has essentially died...from China to Euro zone to America...it is hard to find economies growing at a pace that will support current asset prices (and that includes real property for those who believe they will somehow be spared...if stocks crash...who can afford to buy your real estate at what you paid for it ?).

Stock markets are forward discounting mechanisms and without growth in evidence, the current prices are deemed to high to be sustained. Now some of the volatility is caused by excessive leverage used by large traders (hedge funds and other affiliates) and since they are leveraged they must sell everything quickly to avoid a complete loss and owing more than they have to play with.

Not to mention that the supply of gas and oil will continue to expand for a while, even at prices where the drillers are suffering a loss. They have no choice. So many of them are in debt up to their eyeballs that they must keep drilling just to pay interest on the debt. Look at companies like CHK and CRK. These used to be high flyers, but they're debt will bankrupt them, which in turn will effect the midstream MLPs. And in fact look at ETP/ETE, through its acquisition of WMB, which has CHK as its major customer. It's getting killed. That is the textbook example of the spread of the contagion. And midstream MLPs were supposed to be the one stable area of the oil market--but not when their customers are going bankrupt. Next stop oil and gas bonds. Better hope oil and gas prices get back north of $60 or there will be hell to pay.

[NeverSure]

Since most expats on TV choose to invest money in the markets rather than property...this will hurt big time

Property is so illiquid. At least you can sell your stocks today. I'm a buy and hold guy and I never sell in a down market unless I simply no longer like a particular stock. But then I'm sure to buy another one I like better.

I don't think I'm buying stock but rather a company I believe in. I can't think of a reason to sell that company just because there's a market dip or a recession. I also don't usually buy a stock unless it has a long history of paying a strong dividend. The exception is a newer company that blows my mind such as Microsoft the first time I saw Windows. The first thing I did after I saw Windows was to call my stock broker.

When the real estate market crashed in the US in 2007 - 2008 rents actually went up. People abandoned or lost their houses and rented. I wasn't about to sell a rental at that time.

I'm getting a bit concerned about Microsoft and Walmart which have been two of my best stocks. I'm not going to sell them in this down market even though I'm not sure about their future growth. I'd sell them only if I saw something else I just had to have but right now I don't know what that would be.

Bottom line: Don't be one of those guys who panics and buys high and sells low, LOL.

Cheers.

[i claudius]

Since most expats on TV choose to invest money in the markets rather than property...this will hurt big time

Property will not be spared because the economic potential (rising salaries, rising stock investments) will be diminished thereby also lowering the price at which property will be worth in the market.

Property never loses its value in Thailand,its different here ,even if its empty for 20 years its worth more now than when it was put on the market,didn't you know that?

[tonray]

Since most expats on TV choose to invest money in the markets rather than property...this will hurt big time

Property will not be spared because the economic potential (rising salaries, rising stock investments) will be diminished thereby also lowering the price at which property will be worth in the market.

Property never loses its value in Thailand,its different here ,even if its empty for 20 years its worth more now than when it was put on the market,didn't you know that?

2 reasons why the Thai property market did not go bust in 2008 and why it will go bust the next go round:

1) China was still in its rapid growth phase

2) Central banks of Europe, America, and Japan kept rates near 0% pushing capital flows to emerging market economies where higher yields could be attained

These 2 scenarios are reversed now...in addition these capital flows caused a massive surge in condo building in Thailand...more supply coupled with the mac ro trends driving the market reversing......bend over it's coming.

[elgordo38]

Essentially the big boys run and manipulate the markets for their own purposes.

The small investor & consumers will always be the losers.

Greed and gluttony go hand in hand. Consumers are putting a lock on their wallets time for a breather. House prices are stilling climbing as is the price of new cars/trucks everybody wants to travel and all this is done on credit. Time to pay the piper. Wages are flat lining or dropping and the governments rubber numbers on inflation fool nobody who shops in the real world not Washington or Bangkok. The Feds little blip in interest rates scared a lot of people and also their forecast for more in the future. Bad timing as usual. We are close to the panic stage in the market this week will tell the tale. Friday's can be bad for the market as no one wants to be long on the weekend. If markets don't soon have a dead cat bounce the buying on the dippers will really panic. Next should be interesting. And yes MaeJoMTB the big boys manipulate the market and a good example is precious metals at the moment. Big Banks, governments (these two want fiat funny money to be the main currency King. They hate gold) and the Big money boys have it in a real straight jacket now. Duetsche Bank just declared a doozy of a lose slightly over 7 BILLION bucks.

[ggt]

Countries like the US and Canada are loosing money on every barrel of oil at these prices...some oil companies may go bust rather than keep loosing money...

Counties like Iran and Iraq can still make a profit even if oil drops to around $10 per barrel...they could run the table on big oil in western countries...

Now, just as one thinks it could not get any worse...along comes Iran...sanctions lifted...they will soon enter the fray and the glut of oil will likely only become much worse...

Oil may be the catalyst which is sending stocks lower...but the diminished overall health of world economies it the main problem...with no relief in sight...

[willyumiii]

What is good for consumers is bad for corporations.

Nobody invests in consumers.

[RuamRudy]

Here is an interesting article that describes why the current low oil price is bad for everyone.

[timendres]

Essentially the big boys run and manipulate the markets for their own purposes.

The small investor & consumers will always be the losers.

Right.

I really lost my ass when I bought Google at $100 and watched it go to $1000+

And again, I got abused when I purchased Apple at $6 only to watch it go to $600+

And my gold invest at $300/oz is killing me!

The idea that ANYONE could manipulate the S&P 500 or "the market" is so ludicrous, it doesn't warrant comment.

Indeed, large investment/trading houses can, and do, manipulate individual/specialized markets to certain degrees.

People who believe they can play with the big boys deserve to lose their money.

But those who invest are generally helped by the liquidity that the big players provide, and are rarely taken advantage of for more than pennies, which is the cost of doing business.

[NeverSure]

If you think the big boys manipulate the market then don't play the market. I don't know if they manipulate it but I do believe that "market timers" are suckers. No one has a crystal ball.

If you're going to panic and sell when the market drops, I don't believe you should be in the market. Instead of day trading or trying to time things, put that energy into researching companies. Buy companies, not the stock market. Buy a company you have good reason to believe in and ride with it.

When the market is way down go ahead and sell a stock you're losing confidence in but be sure to use that down market to buy another that you like better. Never pull all of your money out when the market is down.

I got caught in the dot com bust of 2000 as I'd just bought this stock named Amazon. It took a hammering beyond belief right after I bought it. I decided to sit tight to see what happened and would you like to know where that stock has gone since 2000? I danged near sold it to take my losses but decided I'd already taken the loss on paper so I'd just hang on and see if I was right about Amazon's prospects. I got lucky and I mean lucky as I had no control over what happened or any window into the future. It wound up being one of my best winners after all.

Again, don't play the market. Invest in companies and hold them until you no longer believe in them, which may take decades.

Cheers.