Energy Stocks Crushed As Oil Prices Continue To Fall

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Market Digest – Week Ending 11/28

On the surface, major US stock indexes appeared calm over the holiday week, with the S&P 500 gaining 0.3%, but the headline numbers masked a wild week in the Energy sector. OPECs decision not to curtail production in the wake of recent price declines sent Crude tumbling 8%. Oil and gas stocks were hammered along with commodity indexes and commodity dependent currencies. The Russian Ruble is now down about 33% to the dollar for the year, potentially setting the stage for recession and increased economic hardship. Bond yields fell as global investors continue to seek safety in the dollar.

Weekly Returns:

S&P 500: 2,068 (+0.3%)
FTSE All-World ex-US: (-0.3%)
US 10 Year Treasury Yield: 2.20% (-0.11%)
Gold: $1,169 (-2.7%)
USD/EUR: $1.243 (+0.3%)

Major Events:                 

  • Monday – Chuck Hagel stepped down as Secretary of Defense after it became apparent his relationship with the Obama administration had become strained.
  • Monday – In Missouri, a grand jury’s decision not to indict the police officer who killed Michael Brown led to widespread unrest and prompted the governor to call in the National Guard.
  • Wednesday – German Chancellor Merkel accused Russia of violating Europe’s peaceful order and NATO said it may increase support for Ukraine.
  • Thursday – OPEC decided to maintain its production target, sending oil prices down nearly 7%.
  • Friday – Eurozone inflation grew at an annual rate of just 0.3% in November, potentially increasing the likelihood of further stimulus by the ECB.

Our take:

Oil has an uncanny resilience. Loved by some, hated by many, fossil fuels (and especially oil) remain the primary energy source for the modern world. Peak oil theorists predict supply will soon begin to diminish. 2020 has often been cited as an estimate, but then again many expected perpetual production declines as early as 2007.

The price of oil hit $140 in 2008, only to plummet to the mid $40’s at the height of the sub-prime crisis. It quickly rebounded and has generally hovered in the $90-$110 range for the last three years. This was high enough to spur some serious investment in alternative energy sources and we’ve seen solar become a real industry and Tesla prove that electric cars are here to stay.

But innovation was also hard at work in oil production, and improvements in hydraulic fracturing (fracking) technology created a boom in US production. Along with increases in places like Libya, supply has grown faster than demand. On Thanksgiving, an OPEC decision not to cut supply drove oil prices back into the mid $70’s. After the holiday weekend, you’ll likely be able to fill up you tank at under $3 a gallon, even in California. This makes the hurdle for alternative energy sources that much higher. Creative new supply technologies mean not only is there more oil, but that it will remain our primary source of energy longer.

We don’t have a price forecast for oil. It is starting to hit the point where some production projects are no longer profitable, but most can stay above breakeven at anything above the mid $60’s, which makes that a reasonable expectation for a price floor (though prices can always dip below on a short term basis). $60 oil would be good news for consumers and most companies, but bad news in the short term for oil and gas companies and commodity driven economies (like Russia). Don’t count on it – it’s just as likely we’re seeing the bottom for prices now. Either way, it looks oil will be a big part of our lives for a long time to come.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
Craig Birk, CFP®

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