Weekly Market Commentary 10/24/14

Oil Hits the SkidsOil Pumps

The S&P 500 fell 1% last week (October 13 – 17, 2014) in volatile trading, leading market participants and media pundits to speculate on how far the stock market slide—now just over 6% from the September 18, 2014, closing high — might go. In last week’s Weekly Market Commentary, “Pullback Perspective,” we cited the economic backdrop, central bank support, and valuations as reasons the pullback was unlikely to turn into a bear market (a 20% decline). This week we turn to an area that has already entered bear market territory and discuss our outlook for oil and the energy sector.

Why Does Oil Matter?

Oil has a significant impact on several key sectors of the economy:

  • ƒƒ Consumer spending. Consumers spend, on average, 4% of their income on energy (including oil, natural gas, refined gasoline, etc.). As a result, a sharp drop in energy costs can help provide a boost to consumer spending, particularly important as holiday shopping and winter heating season approach.
  • ƒƒ Capital spending. Energy accounts for one-quarter of all capital spending globally, more than any other sector. Oil and gas exploration and production is very capital intensive, and significant infrastructure investments are needed to support the U.S. energy boom.
  • ƒ Transport sector. Oil influences transports as a cost (fuel for airlines,shippers, trucks, etc.), but it also provides growth opportunities as an increasing amount of oil and petroleum products are transported by truck and rail due to the boom in U.S. energy production [Figure 1].

Keys to Finding a Floor

After falling 25% from its summer 2014 highs, West Texas Intermediate (WTI) crude oil, a long-accepted benchmark for U.S. oil prices, began to find its footing in the $81 – 82 range late last week (October 13 – 17, 2014). We believe this lower range may hold for several reasons: Slower global growth is already reflected in oil demand forecasts.
Expectations for global oil demand have fallen significantly in recent months in response to slower growth in Europe, which is teetering on the brink of another recession. The International Energy Agency (IEA) cut its outlook for 2014 oil demand growth by 200,000 barrels per day, or 22%, from the agency’s prior forecast of 900,000. To give some perspective,…

Read Full Report here Weekly Market Commentary 10202014