Oil prices may have been rallying, but I just don’t see how prices are sustainable on additional advances in the oil market. We have the West Texas Intermediate (WTI) oil at around $60.00 a barrel, but we are also seeing increased resistance on the chart.
The current rally in oil prices is largely created by the big reduction in oil rigs across North America, where Baker Hughes estimates there are only 668 rigs in operation. At the same time in 2014, there were just over 1,000 rigs. Quite a difference.
The rig reduction is helping to control the supply side and place a cap on oil prices. The problem I see is that demand from the global economy for energy continues to be fragile. We have the economic growth in Europe that is encouraging. But the continued stalling in the Chinese economy is worrisome. The People’s Bank of China just cut its benchmark lending rate by 25 basis points—the third cut since November 2014. While some are positive about the easing, the cuts suggest the underlying growth in China may be much worse than everyone realizes.
The oil cartel, the Organization of the Petroleum Exporting Countries (OPEC), has refused to cut its production during the downside moves in hopes of the U.S. oil sector cutting rigs and helping to support oil prices. OPEC predicts we will not see oil prices north of $100.00 until at least 2025.
The Impact of Lower Oil Prices
While gasoline prices are much lower now and hopefully helping to drive extra spending due to the rise in disposable income, I’m becoming more concerned about the effect of lower oil prices on the economic renewal and gross domestic product (GDP) growth.
With the massive cut in rigs and overall oil exploration and production, we are in turn seeing tens of thousands of jobs being slashed across the globe.
The previous riches of such places as North Dakota and Fort McMurray in Canada are a mere shadow of the sector’s former glory. The days of easily making six figures by simply moving to areas like these are gone for now…and they may never return.
The problem is that the massive cut in well-paying oil jobs from the lower oil prices not only impact the oil patch workers, but also the numerous sectors that had been benefiting from the riches. Here, I’m talking about the restaurants, hotels, housing, and retail sectors that now have far less money flowing in with the losses in jobs and wages.
If oil prices continue to stay low and oil rigs stay largely offline, we could see a bigger impact on the jobs market and overall economic growth. This would subsequently affect the stock market.
How to Play the Expected Volatility of Oil Prices
If oil prices fail to gather any further momentum and stall at their current $60.00, we could see a relapse on the chart back to the $55.00 level or even down to $50.00. Given this possibility, you could look to accumulate companies for which oil is a major component and hope for oil prices to retrench, which could boost stocks.
Chart courtesy of StockCharts.com
Look at sectors like airlines, airline makers and suppliers, trucking companies, and parcel delivery companies. Lower oil prices will continue to benefit the cost side of companies found in these sectors. If you believe in this strategy, buying now could pan out.