What to Do When Oil Swings
The relationship between stocks and oil prices might be breaking down—but its impact is still being felt in two key sectors. Experts say investors who play those sectors smartly can benefit regardless of where oil prices go from here.
Crude gained 4.7% on July 2, as Iran tested missiles capable of hitting U.S. targets in the Middle East. That price jump, coupled with a 9.4% surge on June 29, capped a nearly 13% rise in just three days of trading, the largest such move since August 2009.
The spike was quite a turnaround from the first half of 2012, when crude shed about 14% of its value, its worst first-half performance since 1998.
But the broad stock market hasn't been following oil's lead. The Standard & Poor's 500-stock index has moved in the same direction as oil in just two of the first six months of 2012, after doing so in 75% of the months from the stock market's bottom in March 2009 through the end of 2011.
"People think of oil and stocks as moving together," says David Kelly, chief global strategist at J.P. Morgan Funds. "But it's a relatively recent phenomenon to think they should move in the same direction."
According to research from Adam Parker, chief U.S. equity strategist at Morgan Stanley, earnings for just two sectors—energy and consumer discretionary—are significantly affected by oil-price movements. Energy stocks receive a boost from higher oil prices, while consumer-discretionary stocks benefit when prices fall.
J.P. Morgan's Mr. Kelly says investors looking to bet on stocks that will benefit from cheaper oil should consider consumer stocks. "If you're not spending money on gasoline, it helps with your spending power," he says.
Consumers may have more to spend with oil prices low. Last year, they took an $80 billion hit from rising oil prices, something that won't occur in 2012 if estimates for lower oil prices from the Energy Information Administration prove accurate, according to Aram Rubinson, a retail analyst at Nomura Securities International.
Crude Oil Update April 2012
Reported in the Wall Street Journal today, the International Energy Agency said on Thursday that more than two years of steadily tightening oil market conditions have reversed for now.
Many observers now see oil prices as stable or headed down, barring other problems coming from theMiddle East. The trend according to market analyst is pointing toward lower gasoline prices into summer and the lead up to the general election in theUS.
Global oil inventories grew by as much as 1.2 million barrels a day in Q1 meaning that the oil market could remain in balance this summer even as almost 1 million barrels a day of Iranian oil is taken off the market by sanctions imposed by the US and other countries.
Another report from OPEC on Thursday concluded that oil markets are well supplied, which is another positive sign for at least stability in the pricing of crude. OPEC’s production ran ahead of demand partly because of an increase bySaudi Arabia(the world’s top exporter of crude oil) and other OPEC members which produced more in recent weeks. Total recent production rose by 135,000 barrels per day and the total increase above normal production in the past 6 months from OPEC is 1.4 million barrels per day. Saudi Arabiahas been at a 30 year high production rate of over 10 million barrels a day. Additionally they have an additional 10 million barrels in storage. This higher level output helped to offset any downturn due from the sanctions onIran.
This weekend talks are planned betweenIranand 6 world powers (US,Russia,China,Germany, theUKand France) to discuss sanctions due toIran’s nuclear program. The downturn inIran’s current export of crude over historical export levels, translates in to a revenue reduction of almost $3 billion in Q1, 2012.
Obama signed into law legislation barring US and foreign firms from dealing withIran’s central bank, the main conduit for Iranian oil sales. The EU is putting in place an embargo on Iranian oil purchases. Both of these go into effect the end of June but have already had an impact on oil sales byIran.
Oil prices went up significantly in Q1 based on fears of global economic slow down in Europe and over tensions withIran’s nuclear program. Prices shot up +14% in February. This month global pricing has moved sideways, and theUSprice is down 5.5% from February, and lower now than a year ago when fighting inLibyacaused concern over supply.
Another impact on crude pricing is the strength of the US dollar. The weaker the dollar, the higher crude prices will go. The forecast is that pricing should be relatively stagnant for the next few months.
With the increased supply outlook for crude, and a slowing economic growth demand, it looks like there may be a possible downward turn in the future.
Putting it in perspective:
TheUScurrently has 90 days supply in our strategic oil stockpiles. Chinahas 40 days supply on hand in theirs. For that reason, China is buying extra crude wanting to shore up their strategic supply to be better prepared if there is a supply stoppage with Iran this summer. Chinaimported 11% of its oil fromIranin 2011 and their oil imports are expected to increase by 13% this year to 5.77 million barrels per day.China’s oil demand is expected to increase 6% this year to 9.9 million barrels per day.
Today’s crude price was at $103.64 per barrel.
Iran's move to cut off oil shipments to Britain and France is expected to have little or no effect on supplies, but had an immediate effect on world prices Monday, as oil prices jumped to a nine-month high above $105 a barrel.
By early afternoon in Europe, benchmark March crude was up $1.91 to $105.15 per barrel in electronic trading on the New York Mercantile Exchange. Earlier in the day, it rose to $105.21, the highest since May. The contract rose 93 cents to settle at $103.24 per barrel in New York on Friday. Read More...