Global equity markets fell overnight led by a sharp sell-off across Energy companies. The move was driven
by a further fall in the price of US crude oil which is now near a 7 year low as it dropped to $38.5 a barrel
from just over $40 before the start of the week.
At The Minute insights
The New Oil Order
Global equity markets fell overnight led by a sharp sell-off across Energy companies. The move was driven
by a further fall in the price of US crude oil which is now near a 7 year low as it dropped to $38.5 a barrel
from just over $40 before the start of the week. The fall was a result of an announcement by the Organisation of the Petroleum Exporting Countries (OPEC) that they will not be cutting back production
levels. OPEC have been increasing production to try and push smaller competitors out of the market, as
excess supply (supply greater than demand for oil) in the market means that prices stay at low levels. At
the same time US production remains at high levels, especially with the ongoing explosion of shale gas
drilling in the US.
Economic Implications
A lower oil price is clearly a negative for the oil companies, but is actually a positive for the broader economy as it lowers one of the key costs. In particular consumers have been benefiting as they spend less on gas and have more money left in their pocket to spend in in other areas. In this way a lower oil price should overall be supportive for economic growth in our view.
What it Means for Stocks
Although most company’s benefit from a lower oil price (excluding oil companies) in the form of lower
costs, recently the falling oil price has also sent stocks lower. believes this correlation has to do with
the global sentiment around economic growth. The falling oil prices signals that there may be insufficient
demand to meet the current over supply. The lack of demand highlights the fear that major developing
nations, such as China, may be slowing down and therefore demand less oil. Once growth fear abate, we
believe lower oil prices are a positive for a number of equity sectors and therefore send their stock prices
higher over the longer term.
Petrol Prices at the Pump
Lower crude oil prices translate into lower gas prices at the pump. However, for Australasia it is slightly
more complex. Although the price of oil has been falling, so has the AUD and then NZD. Because here in
Australia and New Zealand we import oil in USD, when the AUD and NZD fall it makes oil relatively more
expensive for us. By this way, the fall in our currencies offset the fall in oil prices and makes the price at the pump higher than we anticipated.
Outlook for Oil
Oil prices will recover when supply and demand rebalance, although we do not expect any major recovery
in the near term. OPEC looks set to stand its ground and is definitely not cutting back supply, so it the
rebalancing will have to be done by pushing smaller oil producers out of the market (as prices will be too
low for them to run profitable businesses). While we have been seeing cut backs by the major oil
companies, our view is we could be well into 2016 before we see significant signs of rebalancing.
Chart of the Moment – Oil Slide Continues
has remained underweight materials and energy related stocks in our portfolio, and for a good reason. Oil continues to struggle in the wake of considerable excess
supply issues and is now making new price
lows for the year ($38.50). Until these demand supply dynamics are balanced it is hard to see oil having a sharp recovery over the near term. believes that oil may remain under pressure for the near term. Once these issues have been resolved there are a number of companies we
are watching that will benefit considerably.
Five Things Markets Will be Watching this Week
1. Whether global markets can follow the US moves on Friday and reverse the sharp sell-off experienced by markets at the end of last week.
2. The Reserve Bank of NZ will make a monetary policy decision on Thursday. While we believe there is likely to be no change to the official cash rate (OCR) this month, and hints of the timing of further rate cuts in 2016 will be looked for.
3. European GDP numbers will be released on Tuesday, and the health of the European economies will be a key factor in determining whether the European Central bank needs to provide further stimulus.
4. The performance of the US dollar this week will be in focus, as to whether it gains strength on the back of a higher likelihood of a hike by the US Fed, in our view.
5. China export and import data is due to be released on Tuesday, and will be watched closely as investors assess the level of slowdown being experienced in China.