THE BRIGHT SIDE OF CHEAP OIL

Weekly Market Commentary

Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial

Earnings season is here and, as we wrote in our earnings preview last week (“A Tale of Two Earnings Seasons”), low oil prices and the energy sector will be the market’s main focus. Energy companies begin to report earnings this week, as energy services provider Schlumberger releases results on Thursday, January 15, 2015, although most of the sector’s results will come the last week of January and first week of February. While we try to gauge the energy sector outlook, we will also pay close attention to sectors and industries that potentially benefit the most from cheap oil, particularly in the consumer discretionary sector and the transportation industry, or the transports. (This week’s Weekly Economic Commentary, “Drilling into the Labor Market,” discusses energy’s impact on U.S. and state economies and labor markets.)

Depending on your assumptions, savings for the average American
from lower energy prices could reasonably be estimated at
over $1,000 per year.

IT STARTS WITH THE CONSUMER

The obvious place to start when analyzing beneficiaries of cheap oil is the consumer discretionary sector. The “tax cut” from lower prices at the pump is significant. U.S. consumers purchase about 140 billion gallons of gas annually, so a $1.00 drop in gasoline is a net savings of $140 billion (or about 1% of gross domestic product [GDP]). Each household that has been spending about $2,500 per year on gasoline (roughly the national average) will see a drop of perhaps $600 annually, based on U.S. Energy Information Administration (EIA) forecasts. For someone making the median income in the United States (about $52,000), that’s almost an extra week’s paycheck. And the total does not include home heating costs, where additional savings are captured, as the decline came just ahead of the coldest winter months (the sharp drop in natural gas prices is also helping). Depending on your assumptions, savings for the average American from lower energy prices could reasonably be estimated at over $1,000 per year, which for many, is like getting a raise. Keep in mind the consumer represents two-thirds of the U.S. economy.

Read Full Report here: Market Commentary 01122015

Consumer discretionary (CD) Sector historically has benefited from big drops in oil.
Consumer discretionary (CD) Sector historically has benefited from big drops in oil.