Don Worthington

The good and bad of falling crude oil prices

Oil pumps work in the desert oil fields of Sakhir, Bahrain. Russia’s energy minister, Alexander Novak, said, last week that it has agreed with Saudi Arabia, Qatar and Venezuela to freeze oil production at January 2016 levels if other producers do the same following a closed-door meeting in the Doha, Qatar. The meeting reflects growing concern among major oil producers about the effects a prolonged slump in crude prices will have on their domestic economies.
Oil pumps work in the desert oil fields of Sakhir, Bahrain. Russia’s energy minister, Alexander Novak, said, last week that it has agreed with Saudi Arabia, Qatar and Venezuela to freeze oil production at January 2016 levels if other producers do the same following a closed-door meeting in the Doha, Qatar. The meeting reflects growing concern among major oil producers about the effects a prolonged slump in crude prices will have on their domestic economies. AP

A barrel of oil. It’s the commodity most of us are unlikely to ever buy directly but that affects us most every day – often pulling us in two different directions simultaneously.

As consumers we embrace low crude oil prices. Low prices, combined with a global oversupply that is estimated at 1.8 million gallons a day, means low prices at gas pumps. The lowest price in Rock Hill is $1.32 a gallon, with a high of $1.69, according to gas-tracking website GasBuddy.com. About 20 Rock Hill stations are either $1.38 or $1.39 a gallon, according to GasBuddy.com. The state average is $1.50, and the national average is $1.72.

Gas prices soon will rise when refineries change to summer blends, adding between 40 and 70 cents to the per-gallon price, according to Gas Buddy analyst Gregg Laskoski. But the summer-blend price is still far less than what it has been in recent years.

The drop in gas prices is estimated to have saved households about $1,900 annually – money that can be spent elsewhere or saved.

Economists say some consumers are using that moneyfor savings or paying down credit card debt they incurred during the recession. Others hope people will spend the money, which helps boost the economy.

Some convenience stores are reporting higher inside sales as a result of low gas prices.

The flip side

So low gas prices are good, right?

The dip has a different economic impact in gas-producing areas, such as Texas, North Dakota and Oklahoma. Crude prices of $30 a barrel or less have led to higher unemployment.

And crude prices are expected to drop even farther. Last September Goldman Sachs predicted crude prices would drop to between $25 and $20 a barrel. Last week, Larry Carroll, of Carroll Financial of Charlotte, predicted crude prices could continue a drop that started in 2014.

Since then crude prices have fallen by 70 percent, in part due to the excess supply.

For 2016, Carroll predicts per-barrel prices will hit $25.

“But I hope I’m wrong,” Carroll said during his annual market prediction seminar at Winthrop University last week.

He also predicted that by the second quarter of 2016, crude oil prices could rally to the $40-per-barrel range.

For investors, a price of $25 per barrel of crude could mean more woes for the stock market. Often, though not always, when crude prices fall, so do stock prices.

Carroll is quick to point out that a fall – as well as a rise – in stock prices is inevitable in the market. Volatility is the only thing that is 100 percent certain in the stock market, he says. He also notes that the sky-is-falling mentality when the market drops isn’t warranted. Over the last 36 years – including the recessions of 2001-2002 and 2008-2009 – at some point the market has dropped 14 percent. But it recovers over time, he said.

While he hopes oil prices stabilize, he notes that low crude oil prices have presented the potential for investment. If you decide to invest in oil when prices are low, “you don’t have to play aggressive,” Carroll said. “You can be conservative, not take a lot of risk, and still have a decent upside.”

Stocks related to oil, such as the pharmaceutical and bio-tech industries, are potential investments for risk-takers, Carroll said. You want to identify companies in these sectors that are the “disrupters” – companies that are making products that will change the world. “That’s where the winners will be,” Carroll said.

A barrel of crude

A barrel of crude has 42 gallons. It is usually processed into:

▪ 19 gallons of gasoline

▪ 9 gallons of diesel

▪ 4 gallons of jet fuel

▪ 2 gallons of heating oil

▪ 7 gallons of petrochemicals, which are used in medicines, cosmetics, plastics, synthetic fibers and electronic devices, among other things.

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