Market Capital Management

Wednesday, December 3, 2014

The Good News and Bad News of lower oil prices

The other day I filled up the tank of my wife’s Prius for under $25. That is over 25% less expensive than one year ago. With the holiday shopping season on its way, every penny saved is a good thing.  Yet for most every action there is an equally opposite action and this may be true with gas prices as well. 

Oil producers and their associated industries have seen their stock prices decrease in value.  Last Thursday OPEC met to discuss production levels and prices. With Saudi Arabia leading the way the cartel voted to keep production at current levels. The strategy appears to put pressure on US shale oil producers. Most analysts believe the price of oil needs to be around $70 a barrel for producers to be profitable. By keeping prices low OPEC is hoping US shale producers will lower their production and therefore help push up the price of gas in the US. In addition, without the oil production from US shale producers OPEC could take a larger share of the market. 

The big question is whether OPEC’s strategy will work. In the long term, the shale producers most likely will not shut down and walk away because too much infrastructure and money has been invested.  One analyst actually sees a silver lining for the US shale producers. Norbert Ruecker, head of commodity research at Julius Baer thinks OPEC’s new strategy may force the US shale producers to find new ways to lower production costs. In the long run this may keep oil prices low but also allow for all oil producers to make a profit. 

This leads us to the good news of filling up the wife’s Prius tank for under $25 bucks. According to the American Automobile Association gas prices have dropped below $3.00 a gallon. AAA estimates this helps consumers save about $250 million per day as compared to the last few months of summer when prices averaged $3.68 a gallon. 

This savings is like a tax cut for the average American. It’s a good time of the year for the savings to flow into our pockets.  The biggest beneficiaries may be retail companies. Holiday retail sales started mediocre over Black Friday with the physical stores sales down but internet sales up 11%. Hopefully the extra dollars in our pockets will make for a jolly season. 

Alternatively, it is possible consumers learned a lesson from the financial crisis and decided to sock away the extra money in their pockets.  If so that could keep the economy on this slow growth path we have been experiencing. Generally, we can only hold out so long until we need to buy new appliances, cars and clothes. So enjoy the low gas prices while they last. Most analysts believe when the spring comes prices will begin to rebound and over $3.00 a gallon will be back. 

We would love to hear what you think. Feel free to follow our blog, give us a call or email us…until next time

John H. Heil, Senior financial blogger

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