Author Topic: Why are low oil prices so bad for the stockmarket?  (Read 6401 times)

2Cent

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Why are low oil prices so bad for the stockmarket?
« on: January 22, 2016, 04:02:01 AM »
I don't really understand this. Ok, obviously it's bad for oil producers and holders, but there should be just as many oil buyers, like airlines, who should get huge savings which should cancel out the negative effects.

soccerluvof4

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #1 on: January 22, 2016, 04:26:40 AM »
For 1 there weighting in the overall market is enormous so most people have money in those stocks and hence panic sell or the companies tank and there losing there asses... Secondly airlines are usually locked into contracts a year or two behind this so haven't caught the luxury of the reduced cost of barrels. The market was/exhausted so this just perpetuates the sell off.  I saw a chart yesterday that not one of the last 5 recessions started because of low fuel costs but never the less that's why it effects the stock market.  Even if our economy is doing well it hurts the country's we trade or sell to that largely are dependent on oil profits as well as other mineral aspects. Like Brazil is tanked so its not just oil as its almost all material/mineral stocks. There are alot more aspects to it as well.

Monkey Uncle

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #2 on: January 22, 2016, 04:32:59 AM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.

faramund

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #3 on: January 22, 2016, 04:39:17 AM »
The Economist also points out that many oil producing countries are now in deficit. So they are now running down their savings. These savings were built up in many Western countries' stock markets and debt over many years, and so as they draw down their savings, that's putting downward pressure on prices.

mrpercentage

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #4 on: January 22, 2016, 07:16:40 AM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.


+1

Until Iran bombs Saudi Arabia's production. It could totally happen. Or until a huge collection of small players drop dead-- then its back to high oil. No one knows how long it will stay down because there are so many hands in it but right now it is not profitable and that by design means it will go higher period. People don't give stuff away for free; they are exercising a competition destroying agenda similar to Amazon

Heckler

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #5 on: January 22, 2016, 09:22:17 AM »
I suspect its all MMMs fault. Ive been buying a lot less fuel since 2014!

GrOW

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #6 on: January 22, 2016, 09:27:22 AM »
Real impacts mentioned by others above.

I also think there is another impact - markets have been nervous for some time and therefore looking for a negative story to grab a hold of and run with and financial media fuels these fires with great zeal.

Jack

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #7 on: January 22, 2016, 09:29:32 AM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.


+1

Until Iran bombs Saudi Arabia's production. It could totally happen. Or until a huge collection of small players drop dead-- then its back to high oil. No one knows how long it will stay down because there are so many hands in it but right now it is not profitable and that by design means it will go higher period. People don't give stuff away for free; they are exercising a competition destroying agenda similar to Amazon

In this case, is it weak demand or a glut of supply? What's happened in terms of changes in number of barrels produced / sold / whatever?

joninnyc

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #8 on: January 22, 2016, 09:30:09 AM »
Oliver Blanchard was the former chief economist of the IMF and generally thought of to be a smartypants regarding this sort of thing - take a quick read from him: http://blogs.piie.com/realtime/?p=5341

JetBlast

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #9 on: January 22, 2016, 10:19:54 AM »
Secondly airlines are usually locked into contracts a year or two behind this so haven't caught the luxury of the reduced cost of barrels.
They have most certainly caught the big drop in fuel prices. Most are not hedged to fully cover their fuel consumption, but only a percentage, and much of the hedging is fairly straightforward derivatives contract where they lose the premium they paid but more than make up for it in reduced fuel expenses.  In the last couple days Delta, Southwest, and United all reported last quarter and full year results and the drop in fuel expenses is staggering.

Delta's fuel consumption in Q4 was basically flat year over year at 945 million gallons vs. 944 million last year. Fuel expense before hedging and refinery operations (yes, they own an oil refinery) was $1.415 billion versus $2.394 billion last year, a 40.9% decrease. Now including hedging and refinery losses they still saw a YOY decrease of $726 million or 30.3%.

Southwest saw fuel consumption rise 8.6% due to growth, but including hedging had a Q4 fuel expense $189 million lower than last year, a 16.2% drop.  Unhedged it would have been a 36.7% decrease or $422 million.

United's fuel consumption was up a hair at +.3%, but saw their fuel expense drop $948 million or 35.4%. Unhedged it would have been a $1.002 billion or 41.0% decrease.

In Canada, WestJet hasn't announced Q4 yet, but in Q3 reported a 33% drop in fuel prices and had no fuel derivatives contracts. Air Canada on the other hand was seeing a similar decline in fuel prices, but that was partially offset by having ~40% of their Q4 expected fuel consumption hedged with call options, placing a cap on prices between $US65-70 per barrel of WTI crude oil.

They're all seeing a benefit from the drop in oil, but it will vary from airline to airline based on how much of their fuel consumption is hedged and at what price.

Roboturner

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #10 on: January 22, 2016, 10:25:10 AM »
Good summary for all the misinformation about this whole debacle

https://www.reddit.com/r/collapse/comments/4232ji/dispelling_myths_about_oil/

mancityfan

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #11 on: January 22, 2016, 02:19:06 PM »
China. Economic growth in China - and its subsequent demand for oil - has been a major driving force of stock market growth in the last twenty years. Chinese growth is slowing, and that has reduced their demand for oil and the price. The low price of oil is linked to the Chinese slow down, and thus concerns in the stock market. In earlier times, a low oil price may have been seen as a positive. In a related point, OPEC has depressed the price of oil (by raising production levels) in a thinly disguised attempt to destroy the shale oil boom in the US. The main answer though, is China, and concerns over its economic performance.

LAGuy

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #12 on: January 22, 2016, 03:08:08 PM »
One of the big reasons is the debt backing up all the oil drillers here in the US. Investors are afraid of a contagion risk. Drillers have taken on a lot of debt, they go bankrupt. Then, the banks that made the loans go bankrupt. Now, you've got a full blown credit crisis like 2008. Junk bond yields spike (already happening), then people get worried about other companies that are carrying a lot of debt and/or who's stocks have been boosted the past few years by borrowing money and using it to buy back stocks thus boosting their share price.

I think this fear is overblown. The outstanding debt for oil drillers is quite low compared to the housing market (something like 500 billion to compared to 20 trillion), so if we did see a credit crisis it would be nothing like 2008. But, that's the market for you. Jumpy. That said, there hasn't been much (any?) in the way of oil driller bankrupticies yet. I don't think this whole thing is over until a good portion of the US shale drilling industry rolls over. Right now they all think they're going to ride it out.

mrpercentage

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #13 on: January 22, 2016, 05:47:00 PM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.


+1

Until Iran bombs Saudi Arabia's production. It could totally happen. Or until a huge collection of small players drop dead-- then its back to high oil. No one knows how long it will stay down because there are so many hands in it but right now it is not profitable and that by design means it will go higher period. People don't give stuff away for free; they are exercising a competition destroying agenda similar to Amazon

In this case, is it weak demand or a glut of supply? What's happened in terms of changes in number of barrels produced / sold / whatever?

Hard question. There are brighter minds looking at better data than I have. My intuition and opinion thinks its a glut. I say this with the understanding that the world is a complex place and in various places the demand plays a part.

That said-- while there is always a possibility of a fast return I wouldn't bank on it. Not enough players have left the field yet and this is about destroying competition. This, I believe, is the perfect time for me to build up a sizable position over a good amount of time (who knows when oil comes back, this year, next, 2 years from now). When it does come back my rhino charge into the field will pay me huge. There is a distinct possibility I lose big doing the same thing. If my players go under Im screwed. I don't think they will. This is a spartan race with lots of cuts, scrapes, and bruises that has a finishing medal (I believe) waiting for me at the end. My prize will be huge dividends even if some of them are suspended or temporarily cut. Im thinking years not the fast trade. Fast traders beware-- there is opportunity but you may get stuck in something longer than you like and have to take losses to move on.

younggunner

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #14 on: January 22, 2016, 07:01:09 PM »
Another thing to consider that I think a lot of people don't realize if they don't have any oil / gas work in their town is the huge effect it also has on the local economies:

An oil boom in your town or state, will also cause-

Hotels booming, restaurants, trucking companies, rental companies, walmarts, gas stations, any retail stores, entertainment venues, etc., all to boom.. There are many cities and states as examples, but among some of the other above mentioned reasons, when drilling and oil activity slows or stops, so does a lot of other companies revenues and profits that are booming $$ right along side of the oil companies.  It's  very possible that these companies are now not making the money they used to with all the layoffs in the oil and gas industry.  Some of the boom towns are like ghost towns now...

whodidntante

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #15 on: January 22, 2016, 11:42:06 PM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.

I agree some people may believe that.  I think they're wrong.  Oil has a low price elasticity of demand, and oversupply is the largest factor in why oil prices are this low. 

Monkey Uncle

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #16 on: January 23, 2016, 04:23:04 AM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.

I agree some people may believe that.  I think they're wrong.  Oil has a low price elasticity of demand, and oversupply is the largest factor in why oil prices are this low.

Check out Roboturner's reddit link above.  That person is making the argument that the price decline really is due to low demand, rather than a supply glut.  I did not take the time to check all the source links to see if the argument really holds up.  Roboturner, have you looked at that in any more depth?

ender

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #17 on: January 23, 2016, 09:11:25 AM »
Another thing to consider that I think a lot of people don't realize if they don't have any oil / gas work in their town is the huge effect it also has on the local economies:

An oil boom in your town or state, will also cause-

Hotels booming, restaurants, trucking companies, rental companies, walmarts, gas stations, any retail stores, entertainment venues, etc., all to boom.. There are many cities and states as examples, but among some of the other above mentioned reasons, when drilling and oil activity slows or stops, so does a lot of other companies revenues and profits that are booming $$ right along side of the oil companies.  It's  very possible that these companies are now not making the money they used to with all the layoffs in the oil and gas industry.  Some of the boom towns are like ghost towns now...

This is definitely the case.

Energy in general drives a lot of construction jobs and that drives the need for construction equipment, which drives the need for labor/etc.

A previous company I worked for was pretty tied to construction equipment manufacturing and when oil is down, that reduced overall construction equipment sales considerably. Plus the ripple down effects to smaller places that are more directly involved.

Rezdent

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #18 on: January 23, 2016, 09:39:25 AM »
I remember the last oil bust in Austin.  Construction just halted, there were huge cranes sitting idle on half-finished buildings.
Of course, Texas is more diversified now, so I don't expect it will be as bad.

Quote
When oil prices plummeted in 1986, the effects went far beyond the energy industry, shaking the economic, academic, cultural and social foundations of an entire region.

Texas lost 230,000 jobs. Louisiana lost 9% of its work force, larger than the national percentage during the Great Depression. Libraries closed in New Orleans. Scores of nationally renowned professors fled Louisiana State University, and prestigious faculty chairs at the University of Texas and Texas A&M went unfilled. Teachers in Oklahoma and Texas suffered through years of low pay and salary cuts. Hundreds of savings and loans and banks, run poorly and often corruptly, fell into insolvency in the first wave of a massive national financial scandal.

Source: http://articles.latimes.com/1990-11-18/news/mn-6593_1_oil-prices

Roboturner

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #19 on: January 25, 2016, 01:14:59 PM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.

I agree some people may believe that.  I think they're wrong.  Oil has a low price elasticity of demand, and oversupply is the largest factor in why oil prices are this low.

Check out Roboturner's reddit link above.  That person is making the argument that the price decline really is due to low demand, rather than a supply glut.  I did not take the time to check all the source links to see if the argument really holds up.  Roboturner, have you looked at that in any more depth?

*simplified thoughts*

Yeah, and yes most of the points are valid, I wouldn't hinge so much on "Low demand" - it certainly plays a part, but the point is that the Supply glut is primarily caused more or less by the US not SA. In that when supply got to high, and prices too low in the past, OPEC would throttle production - limiting availability and causing prices to rise. Lately every time a production throttle would happen, North America and Russia would gobble up the excess room, this then forced OPEC to make a choice, continue to lose market share by throttling, or say "F-it, we're going to continue producing at our rates, prices be damned" - thus protecting market share, rather than prices.

B/C there is no cartel here, North America can't throttle production, in fact the immediate response was to produce more - as our oil industry is built on cash flow. It's a circle of death for everyone involved. SA has no choice but to try and bankrupt competitors, else, they would need to secede more and more market share as new countries came online to protect prices. Low demand just exacerbates the issue. If demand continued rising, there would be room* for production increases.

*I'm not absolving OPEC, as with rising demand, SA and OPEC would want to raise production proportionally to protect market share... too long have they had a monopoly on the world oil supply. North America simply came on too strong too fast, causing OPEC to panic.

I guess the TLDR version is SA and OPEC have a brilliant strategy that I would also employ in their situation. Just sucks real hard for anyone in the oil industry (myself included).



whodidntante

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Re: Why are low oil prices so bad for the stockmarket?
« Reply #20 on: January 25, 2016, 09:51:58 PM »
People view the falling price of oil as an overall indicator of weak demand in the global economy, i.e., a recession signal.  Whether that view is accurate or not, only time will tell.

I agree some people may believe that.  I think they're wrong.  Oil has a low price elasticity of demand, and oversupply is the largest factor in why oil prices are this low.


Check out Roboturner's reddit link above.  That person is making the argument that the price decline really is due to low demand, rather than a supply glut.  I did not take the time to check all the source links to see if the argument really holds up.  Roboturner, have you looked at that in any more depth?

Schlumberger said demand is up when they reported earnings.  They are insiders and they should know.