Will Tumbling Oil Prices Hit the Broader Economy?

Tuesday, June 20th, 2017

With a barrel of oil on the global market stubbornly continuing to fall to multi-month lows — tumbling down toward $43 per barrel in today's pre-market — traders and investors may once again be awakening toward an "energy contagion" that submerged the market a couple years back, when oil prices in free-fall began to negatively affect other industries that rely on higher fuel consumption prices to earn acceptable profit margins.

You may recall industrials, etc. were landing on hard times as replacement equipment for things like oil pipelines and rigs were not hitting normal cycles, generating less income for the bottom line for these companies, as well as those firms that service those replacements. What resulted was a market sell-off which confounded some market participants; after all, lower oil (read: gasoline, jet fuel, etc.) prices generate fewer costs/higher earnings, particularly for the consumer. Spending less on energy should have provided a boon to the market, but in aggregate we saw returns dwindle.

As renewables continue to take market share from traditional sources of energy, we see things like the OPEC cutback in oil production having less effect than we might have predicted in years past. But more than solar and wind industries growing, which they indeed are, the U.S. shale boom from fracking is the main reason we're seeing less demand for global oil (specifically the Middle East), which is keeping the supply glut high even with the OPEC deal.

Then again, what choice do the members of the Middle Eastern oil producers consortium have? Breaking the OPEC deal — which was recently extended through Q1 2018 — would only send prices of a barrel of oil down further.

Normally, this continued supply glut would indicate a slowing global economy, but this time it's different. Competition with different sources of energy has proven to be the game-changer, without anything in sight looking to augment this trajectory. Those days of $147 barrels of oil from a decade ago look to be permanently a page out of history.

Most oil super-majors are Zacks Rank #3 (Hold)-rated stocks, including Exxon Mobil XOM, Chevron CVX and BP BP. The Vienna-based OMV AG OMVJF is currently a Zacks Rank #2 (Buy) stock.

Mark Vickery
Senior Editor

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