Oil prices hit their lowest in years and the export ban on U.S. crude oil was lifted after a larger spending bill passed through Congress at the end of December. The $1.1 trillion spending measure helped to stave off a government shutdown and includes a variety of measures outside crude oil, such as a provision that lets publicly traded companies not disclose political contributions to the SEC and another that restores benefits to Sept. 11’s first responders. The bill’s scope was very broad and included many compromises from both parties. “I’m not wild about everything in it. I’m sure that’s true of everybody,” said President Obama. “But it is a budget that, as I insisted, invests in our military and the middle class.”
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Oil and the Domestic Need
While the United States imports over 7 million barrels of oil each day, crude oil is not something that can be easily swapped around. There are variations in the density of the crude, the sulfur content, and the suitability for different uses. Big domestic oil producers like ConocoPhillips argued in favor of lifting the ban, saying that “keeping the export ban would push down domestic prices until drilling became unprofitable, jeopardizing the U.S. goal of energy independence,” writes Bloomberg. While some politicians expressed concern that “allowing crude exports could lead to higher U.S. gasoline prices,” so far that has not been the case. “Now production, which averaged 7.4 million barrels a day in 2013, will average 9 million barrels a day by the end of 2015,” explains Bloomberg. “This is pushing down domestic prices more than foreign ones: West Texas Intermediate crude will average $49.53 a barrel in 2015, while Brent, the international benchmark, will average $53.96, the U.S. Energy Department estimates.”
That quote was published on December 18, 2015. On January 7, 2016, Brent dipped to less than $33 a barrel, the lowest price since 2003, and according to the Wall Street Journal, “Oil could fall to less than $30 a barrel in the coming weeks, especially if sanctions are lifted in Iran, allowing the country to flood the oversupplied market with more crude, analysts said. This price came after a sell-off that came on the heels of the U.S. government reporting an increase in domestic gasoline supplies of 10.6 million barrels, worries about the Chinese economy, and slower growth in the global economy, but they still represent quite a change over less than three weeks.
What Does it Mean for Investors?
As long as oil prices stay depressed, there is the chance for a ripple effect throughout many different industries. Transportation companies, like UPS and FedEx, will find that it costs less to move packages, while airlines will find that it is cheaper to fly their planes. This combined with lower fuel prices could lower the cost of travel, and that could mean that more people take holidays. If so, hotel stocks and resort businesses could see a boost. People may also use the extra money they save from lower fuel costs to go out and eat or shop more, raising restaurant or retail earnings respectively. Some may start spending more on groceries, at coffee shops, or home improvement.
The problem is that so far, this has not happened – even though oil futures keep dipping lower. There is every chance that lower oil prices could be the new reality, but there is no way of knowing just yet, and it will take time for the effect of the lifting of the oil export ban to be fully-realized. Plus, there is a “global glut of crude” and that excess means that prices can stay low for a while longer.
Playing the Odds
While there is a chance that company earnings will rise as people take advantage of lower oil prices, right now, risk aversion is a dominating factor in many portfolio decisions. There are just too many uncertainties and not enough upside on the horizon, but not everyone sees a bleak picture. “While some investors are using declines in global equity markets as a buying opportunity, many investors have decided to sit on the sidelines and wait it out,” wrote the Wall Street Journal on Thursday. The ones who are investing are keeping an eye on earnings season. Morgan Stanley Investment Management portfolio manager Andrew Slimmon said, “If you think back to last August and September, the market ultimately righted itself when companies started to report earnings–that was why the market came roaring back in October. I think it’s likely we have better earnings growth for 2016 than 2015.”
In the meantime, some equities will dip on momentum, presenting an opportunity for a shorter term play, and investors with a longer-term investment horizon may find some good bargains, but alternative investments and government bonds may present a better option for many. Expect strong gains in gold also, at least in the short term. Gold topped $1,100 an ounce, hitting a two-month high, but it might not be able to sustain the rally. According to The Week, “Analysts have been quick to point out that ‘safe-haven’ rallies tend to be short-lived unless they come amid a full-blown financial crisis, which few are currently predicting.” Right now, Fed projections for U.S. growth and inflation seem to point away from another recession, but there are no guarantees. According to ZeroHedge, “UBS expects S&P 500 to move into a 2Q top and fall into a full-size bear market, with risk of a 20% to 30% correction into minimum later 2016 and worst case early 2017.”