The price of crude oil has fallen approximately 50 percent since the middle of 2014 due to an over-supply of oil and weaker worldwide demand, especially from countries like China.
However, the sudden plunge has more to do with the OPEC decision not to cut production. Saudi Arabia has massive US dollar reserves and will continue to dip into those reserves in order to balance its budget and to attain that country’s goal of driving US shale companies and a glut of other fossil fuel energy producers out of business.
On the positive side, low oil prices are reducing energy costs for American consumers and businesses. This allows more consumer spending as it costs less to heat homes and fill up a gas tank.
On the negative side, lower gasoline prices have an adverse impact on the US energy sector, causing a cut back in capital spending in those industries and many layoffs.
Over the coming weeks we have to monitor the impact of collapsing oil prices and decide whether or not the benefits offset the concentrated losses to the energy sector.
If oil prices remain depressed for long, many regional banks could suffer due to rising defaults. This is because a high percentage of the high-yield bond market is comprised of oil company loans. Should this occur, it is estimated that up to 250,000 jobs will be lost in Texas, Oklahoma and North Dakota.
The direction we see for oil prices is upward due to the removal of oil rigs from production, greater consumer demand as the economy improves and the approaching driving season. Consumers can look for gasoline prices to be back to around $2.75 by summer.
While there are strong arguments for oil prices to rise and strong arguments for oil prices to go down, we suggest that it is not prudent at this time to buy oil stocks. In our opinion, any bet on oil stocks at this time carries too much risk in relation to potential reward.
So, just say no to oil stocks for now. There are better places to put your money.