AMERIPRISE FINANCIAL, INC. 
Oil prices continue to tumble: Who benefits and who doesn't?
11/10/2014 | David Joy
Citing falling energy prices and rising consumer confidence among other factors, energy prices have certainly captured a lot of attention recently. Between late June and early November, the price of West Texas Intermediate (WTI) crude oil fell from $107.00 a barrel to $77.00, a decline of 28 percent. During that time, the national average price of a gallon of regular unleaded gasoline has fallen from $3.66 to $2.93, which is the first time the price has been below $3.00 since 2010. Between mid-June and late-October, the price of natural gas fell from $4.76 per (mmBTUs) to $3.56, a 25 percent decline.
The beneficiaries of these moves are not hard to find. Consumers are saving money every time they fill up. It is estimated that each day consumers are collectively saving $100 million compared to one year ago.
Energy intensive industries are big savers as well, including airlines, truckers and other transports. The country's retailers are also hopeful that some of these savings will be directed their way during the current holiday shopping season. The National Retail Federation estimates that sales will grow this year by 4.1 percent, compared to last year's rise of 3.1 percent.
Countries that import most of their energy needs are also big winners. Of course, there are losers as well. Oil exporting countries are among the first to feel the pain. Russia, for example, is estimated to require a price of $100.00 per barrel to balance its budget. The current price for North Sea Brent crude, the global benchmark, is $84.00 a barrel, down from $113.00 in June. In addition to the economic sanctions imposed by the West in response to the Ukrainian invasion, this downturn in the price of oil means Russia's economy is suffering.
The Organization of Petroleum Exporting Country (OPEC) members are also feeling the pain, but so far production has not been cut to stabilize prices. Domestic production in the U.S. is also impacted, particularly capital intensive projects in tight energy formations, like shale. It is estimated that some such projects require a price of $80.00 to remain profitable, while for others it is as low as $55.00. If the price continues to fall, or even stays at current levels for an extended period of time, expect some production to be lowered. For the economy as a whole, falling prices are generally a net positive for growth.
The question of whether energy prices are likely to continue to fall, or for how long they will remain at current levels, depends on a number of variables. The global economy remains sluggish, suggesting crude oil demand will remain subdued. The International Monetary Fund recently lowered its outlook for growth in 2015 from 4.0 percent to 3.8 percent. If prices fall much further, the OPEC is more likely to cut production to support prices, rather than focusing on market share and squeezing competitors, as they currently are.
At an informal meeting in Vienna last week, some oil ministers of the cartel said that production would be cut if Brent oil fell below $70.00. The ministers meet formally on November 27. AAA reports that the retail price of gasoline could fall further, even if oil stabilizes, due to a lag between price changes in the wholesale and retail markets.
In addition, driving demand typically falls during the colder months, and winter blend gasoline is cheaper to produce than summer blends. The price for WTI has bounced higher by $1.11 a barrel in the past few days, and Brent has stopped falling. The domestic natural gas market has witnessed a price spike in the past two weeks. The price has climbed for ten straight days in response to forecasts of colder weather, driving the price from $3.56 to $4.36.
So far this year, the XLE energy sector ETF is down 1.0 percent, well behind the overall S&P 500's gain of 10.0 percent. But it has rallied sharply off its mid-October low, rising 9.4 percent since October 14, matching the overall market.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The Organization of the Petroleum Exporting Countries is an international organization and economic cartel whose mission is to coordinate the policies of the oil-producing countries.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
11/10/2014 | David Joy
Citing falling energy prices and rising consumer confidence among other factors, energy prices have certainly captured a lot of attention recently. Between late June and early November, the price of West Texas Intermediate (WTI) crude oil fell from $107.00 a barrel to $77.00, a decline of 28 percent. During that time, the national average price of a gallon of regular unleaded gasoline has fallen from $3.66 to $2.93, which is the first time the price has been below $3.00 since 2010. Between mid-June and late-October, the price of natural gas fell from $4.76 per (mmBTUs) to $3.56, a 25 percent decline.
The beneficiaries of these moves are not hard to find. Consumers are saving money every time they fill up. It is estimated that each day consumers are collectively saving $100 million compared to one year ago.
Energy intensive industries are big savers as well, including airlines, truckers and other transports. The country's retailers are also hopeful that some of these savings will be directed their way during the current holiday shopping season. The National Retail Federation estimates that sales will grow this year by 4.1 percent, compared to last year's rise of 3.1 percent.
Countries that import most of their energy needs are also big winners. Of course, there are losers as well. Oil exporting countries are among the first to feel the pain. Russia, for example, is estimated to require a price of $100.00 per barrel to balance its budget. The current price for North Sea Brent crude, the global benchmark, is $84.00 a barrel, down from $113.00 in June. In addition to the economic sanctions imposed by the West in response to the Ukrainian invasion, this downturn in the price of oil means Russia's economy is suffering.
The Organization of Petroleum Exporting Country (OPEC) members are also feeling the pain, but so far production has not been cut to stabilize prices. Domestic production in the U.S. is also impacted, particularly capital intensive projects in tight energy formations, like shale. It is estimated that some such projects require a price of $80.00 to remain profitable, while for others it is as low as $55.00. If the price continues to fall, or even stays at current levels for an extended period of time, expect some production to be lowered. For the economy as a whole, falling prices are generally a net positive for growth.
The question of whether energy prices are likely to continue to fall, or for how long they will remain at current levels, depends on a number of variables. The global economy remains sluggish, suggesting crude oil demand will remain subdued. The International Monetary Fund recently lowered its outlook for growth in 2015 from 4.0 percent to 3.8 percent. If prices fall much further, the OPEC is more likely to cut production to support prices, rather than focusing on market share and squeezing competitors, as they currently are.
At an informal meeting in Vienna last week, some oil ministers of the cartel said that production would be cut if Brent oil fell below $70.00. The ministers meet formally on November 27. AAA reports that the retail price of gasoline could fall further, even if oil stabilizes, due to a lag between price changes in the wholesale and retail markets.
In addition, driving demand typically falls during the colder months, and winter blend gasoline is cheaper to produce than summer blends. The price for WTI has bounced higher by $1.11 a barrel in the past few days, and Brent has stopped falling. The domestic natural gas market has witnessed a price spike in the past two weeks. The price has climbed for ten straight days in response to forecasts of colder weather, driving the price from $3.56 to $4.36.
So far this year, the XLE energy sector ETF is down 1.0 percent, well behind the overall S&P 500's gain of 10.0 percent. But it has rallied sharply off its mid-October low, rising 9.4 percent since October 14, matching the overall market.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The Organization of the Petroleum Exporting Countries is an international organization and economic cartel whose mission is to coordinate the policies of the oil-producing countries.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
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