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Stock Catalyst: Crude Oil Prices Hit 3-Month Low as Supply Builds

July 7, 2015
Oversupply of crude oil?

Crude oil prices slid to a three-month low this week, driven by concerns about global energy demand and reports saying Iran seeks to double its oil exports if economic sanctions against the country are lifted.

For U.S. investors, the renewed drop in crude oil prices could prove to be a boon to the U.S. economy and consumer stocks. Of course, energy stocks—a strong contingency in the S&P 500 (SPX)—could feel the pressure of lower prices. And if weaker crude is a symptom of a slowing global economy, the U.S. could feel those ripples, too.

So, plenty to think about as crude oil and stock traders keep close tabs on the nuclear talks with Iran. The Wall Street Journal reported that Iran wants to pump its crude oil exports up to 2.3 million barrels per day if a deal is struck and sanctions tied to its nuclear developments are lifted. That would add more crude to an already oversupplied global oil market.

In Monday trading, West Texas Intermediate (WTI) crude futures dropped below the $54-per-barrel level, touching their lowest level since mid-April.

Greece’s Impact and More

The weekend "No" vote in Greece’s austerity referendum and recent declines in Chinese equities also raise concerns over the health of the global economy, and in turn, overall demand for crude oil.

"Even though Greece is a particularly small consumer of oil, it is the risk of contagion and in a worst case, another recession in the eurozone, which has weighed on oil prices," wrote analysts at Capital Economics in a research note to clients. The firm lowered its end-2015 WTI crude oil forecast to $50 from $55 per barrel on Monday.

"The crude oil declines reveal overall concerns about global economic growth. If Europe has to focus on fixing the problems with Greece, Europe will see more challenges to its growth," warns Sam Stovall, chief U.S. equity strategist at S&P Capital IQ. "Maybe people just don't think the economic growth will be strong enough to sustain demand.”

The recent push lower in crude oil has also weakened the technical chart outlook for the market. "Our short-term bearish view for WTI crude oil was encouraged by the close below 57.60, the 100-day moving average. The subsequent break below support in the 56.50 area adds to our bearish conviction. We are looking for a move toward targets in the 49.90/50.45 area," wrote Barclays analysts in a research note.

Domestic Help?

The renewed downtrend in crude oil prices could ultimately benefit the U.S. economy and stock market. Every $10 decline in the price of oil is estimated to add from 0.20% to 0.25% in real GDP, Stovall said. "We could see continuing improving in confidence and spending habits here in the U.S.," he said.

But haven’t we been waiting for that already?

When crude oil futures fell at the beginning of 2015, the belief was that retail sales would explode. "We’ve not seen that," says JJ Kinahan, chief strategist at TD Ameritrade. But auto sales and the housing market have been strong. That means consumers may have been saving for higher-ticket items, Kinahan adds. A sector that could benefit from the decline in crude oil prices is the consumer discretionary category, which includes autos, homebuilding, and retailing companies.

"Where will consumers spend their money? On autos? Higher-end retailers? Fast-food companies connected to gas stations? The amount of energy drinks being purchased has jumped because the primary point of purchase is at a gas station," Kinahan noted.

There’s a downside for certain stock segments, too: namely, the energy and energy services sectors (figure 1).

"We’ve seen a lot of jobs eliminated in the oil and gas sector. As the price of oil gets cheaper, it doesn't make sense for some of these companies to expand mining operations," said Kinahan. “If they are making primary revenues from oil drilling, a company could be in trouble. It could be a tough time for that company earning-wise.” 

Drivers for an energy stock

FIGURE 1: WHAT DRIVES AN ENERGY STOCK? Drill down on company exposure, including the major energy sector participant shown here, by researching the drivers that power earnings. This analysis, as well as other company fundamentals, are features of TD Ameritrade’s thinkorswim® platform. Log in, open the Trade tab, type in the ticker, and click Company Profile. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

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