How low can oil go?

Nov 25, 2014   //   by Profitly   //   Market, Profitly  //  Comments Off on How low can oil go?


There has been no shortage of oil headlines recently, and for good reason. Prices have dropped to their lowest levels in 4 years, and commuters are seeing a noticeable different when filling up their cars at the gas station. We don’t focus on macro trends at, but that doesn’t mean we don’t look at them at all. When something as big as this happens, you have to pay attention.

Consider this, the average price of a gallon of gasoline is now about $2.90, the lowest since 2010, according to AAA. That’s down 78 cents from 2014’s $3.69 peak. With Americans spending roughly $1 billion a day on gasoline, several analysts and industry experts estimate that consumers will save roughly $8.4 billion in November and December, compared with the last two months of 2013, based on an average price for regular gasoline of about $2.89 a gallon as opposed to $3.23 last November and $3.26 last December. Just in time for the holiday shopping season. Retail sales were released last week and came in better than expected, increasing .3 percent vs analyst estimates of .2 precent. Walmart, which released third-quarter results Thursday, took note of the lower gas prices and credited them for a 0.5 percent gain in same-store sales. Analysts took note of the nation’s largest retailer’s results; that was their first quarterly sales gain since 2012. Some experts are predating gas prices could go as low as $2.79 by mid-December, again just in time for last minute holiday shopping. A survey released Friday by the National Association of Convenience Stores found 51 percent of men and 56 percent of those aged 18 to 34 say they are more likely to increase holiday spending.

The lower gas prices are also helping the average mood of consumers. Other data showed an improving jobs market and lower gasoline prices lifted consumer spirits in early November. The Thomson Reuters/University of Michigan sentiment index rose to 89.4, its highest level since July 2007.

The impact is especially significant for low- and middle-income Americans, who have been largely left behind by the slow economic recovery that began in 2009. Even as the job market has improved, most workers have received only modest wage increases. Median income remains roughly 5 percent below the peak it hit in 2007.

Take a look at this quote from a New York Times  story: “When oil prices fall, the benefit to consumers outweighs the loss to producers,” said Dean Maki, chief United States economist at Barclays. “Investment in oil and gas production is still less than 1 percent of gross domestic product. Consumer spending is 68.5 percent of G.D.P.”

Also from the Times is this: The typical American household buys 1,200 gallons annually, so if prices fall to the level Mr. Kloza predicts and stay there, that adds up to a yearly savings per household of at least $400. A 15 percent drop in the cost of home heating oil since last winter should also be helpful, especially as cold weather arrives in the Northeast. Barclays says this extra cash in wallets could help generate nearly half a percentage point in added economic growth in the fourth quarter, and roughly $70 billion more in consumer spending over the next year.

Analysts are all anxiously awaiting the next meeting out of OPEC, set for November 27. Many had believed the oil cartel would cut production much earlier, and this is their next chance to do so. That also lands on the Thanksgiving day holiday, so the thinly traded market could make for some wild swings, and that’s a big reason for even penny stock traders to watch it.

Other reasons that you should all be paying attention to this? The basic knowledge of staying up to date with what is going on in the economy and the rest of the world will help you in your trading. You get a sense of consumer’s moods, what events might trigger a big selloff, if there is more or less likelihood of earnings winners, and much more. Just because you aren’t trading Apple or Walmart doesn’t mean you can just ignore all of the big headlines.

It sounds like you’ll be paying attention to oil for awhile too. Listen to this: “We think lower gas prices in the U.S. are going to last for at least a year,” said Edward L. Morse, global head of commodities research at Citigroup told the New York Times. “Even if growth turns around globally, it would take two years of added demand around the world to move prices per barrel back to the mid-90s.”

Keep an eye on this story, it’s going to impact a lot of stocks in the weeks to come.