Oil is down - and this is bad?

[CaptTom]

OK, maybe some of you whiz-kid investor types can explain this:

Oil just did something it hasn’t done in more than 30 years (hint: it isn’t good)

If I understand correctly, the article suggests that lower oil prices are bad.

Now, for me personally, for everyone I know, and for every business I can think of (except oil producers and their support industries), lower oil prices are a good thing.

I've observed that that overall economy seems to do poorly when oil prices spike, although admittedly ExxonMobile stockholders do well.

I look at oil prices like taxes. Something everyone has to pay, and something that's priced into every product we buy. Lower the "tax" and it frees up all kinds of money which does its multiplier effect thing throughout the economy.

So why are the financial news outlets always crying when the price goes down, and happy when it goes up?

 

[REWahoo]

Here ya go:

How Oil Prices Impact the U.S. Economy

Before the resurgence in U.S. oil production, drops in the price of oil were largely viewed as positive because it lowered the price of importing oil and reduced costs for the manufacturing and transport sectors. This reduction of costs could be passed on to the consumer. Greater discretionary income for consumer spending can further stimulate the economy. However now that the United States has increased oil production, low oil prices can hurt U.S. oil companies and affect domestic oil industry workers.

.......

The other groups that tend to suffer when U.S. oil prices drop are the banking and investment sectors. There are a lot of different companies drilling and servicing wells on the shale deposits, and many of these companies finance their operations by raising capital and taking on debt. This means that investors and banks both have money to lose if the price of oil drops to where new wells are no longer profitable and the companies dependent on drilling and service then go out of business. Of course, investors and bankers are well-versed in risks and rewards, but the losses still destroy capital when they happen. Between the job losses and the capital losses, a dip in oil prices can trim the growth of the U.S. economy.

 

[aja8888]

OK, maybe some of you whiz-kid investor types can explain this:

Oil just did something it hasn’t done in more than 30 years (hint: it isn’t good)

If I understand correctly, the article suggests that lower oil prices are bad.

Now, for me personally, for everyone I know, and for every business I can think of (except oil producers and their support industries), lower oil prices are a good thing.

I've observed that that overall economy seems to do poorly when oil prices spike, although admittedly ExxonMobile stockholders do well.

I look at oil prices like taxes. Something everyone has to pay, and something that's priced into every product we buy. Lower the "tax" and it frees up all kinds of money which does its multiplier effect thing throughout the economy.

So why are the financial news outlets always crying when the price goes down, and happy when it goes up?

Having been in the oil business for 35 years, all I can say is sometimes it's bad when oil prices fall and sometimes it's good. Oil is a commodity and it's price will always fluctuate. When crude oil gets to $25/BBL, buy Exxon. When that happens, the OPEC members will be ready to slit each other's throats.

 

[audreyh1]

Well, this is absolutely nothing like 2015 which had a huge drop in oil prices, so I'm shrugging except I was very pleased to pay $2.19 a gallon when we filled up at Costco yesterday.

 

[Breedlove]

Hurts a lot of developing countries Nigeria , Venezuala , KAZ Peru Indo. ETC . These countries have some big loans and some of them oil is most of their income . THis might be a way to finally finish Venezuala and get rid of their dictator.
Lots of local drillers and service companies have big debt that could be a drag on banks . They will be drilling like crazy . Try to catch a dime


Real cheap is not good and neither is real high , everyone in the business needs to make a profit and not destroy demand in doing it.

 

[Oz investor]

there are some businesses that have lent or invested a LOT of cash to oil industry businesses , they might like that investment returned sooner rather than never

also the US would like some more export $$$ , higher oil prices would help that

 

[Breedlove]

I don't think WTI will fall much more then to maybe 55.00 ….No news .

 

[Jerry1]

I think it’s good to have oil high enough that it is financially sound to produce oil in the U.S. in order to maintain a level of energy independence.

 

[CaptTom]

Good points all, thanks! Maybe the fundamentals really have changed as we (the US) have shifted to an oil exporting, rather than importing, nation.

Sorry if I still have no sympathy for the oil giants and big lenders when I fill up my tank. But maybe I won't wish for oil prices to go TOO low now.

 

[aja8888]

Good points all, thanks! Maybe the fundamentals really have changed as we (the US) have shifted to an oil exporting, rather than importing, nation.

Sorry if I still have no sympathy for the oil giants and big lenders when I fill up my tank. But maybe I won't wish for oil prices to go TOO low now.

We still import about 1/4 of our crude oil needs. We export many products, including diesel fuel, gasoline, natural gas liquids, etc.

What the U.S. producers have done in the last decade is become a threat as to being the "swing producer" in worldwide crude oil production. Our ability to develop horizontal drilling and figure out how to economically get hydrocarbons out of hard shale has given our producers about 2 MM BPD of increased production over the last decade.

Our shale reserves are large and as an example of our ability to bring on crude oil production quickly, we have about 3,600 wells drilled in south Texas that are "not completed" (not fracced) and could be producing in 30 days or so. Similar drill and shut in but not complete strategy is going on in North Dakota.

So it's all good.

 

[GrayHare]

So why are the financial news outlets always crying when the price goes down, and happy when it goes up?

A drop in oil price often reflects a slowing economy, or one expected to slow, which is bad for equities in general. Airlines might be the industry that benefits the most from lower oil prices, so their stocks often diverge from the general trend.

 

[aja8888]

A drop in oil price often reflects a slowing economy, or one expected to slow, which is bad for equities in general. Airlines might be the industry that benefits the most from lower oil prices, so their stocks often diverge from the general trend.

The U.S. industrial companies use a great deal of oil and natural gas. Cheaper fuels (manufacturing) and natural gas feedstocks (plastics production) will lower the operating costs of many businesses. The list is large as to who uses oil and natural gas in this country.

 

[NYEXPAT]

There is a fear on Wall Street (justified or not) that lower oil prices could point to a worldwide economic slow down as evidenced by the growing divergence between US markets and most of the rest of world. Obvious exception bieng Brazil which is up strongly since the assassination attempt and ultimate election of "Trump of the Tropics"!

 

[aja8888]

There is a fear on Wall Street (justified or not) that lower oil prices could point to a worldwide economic slow down as evidenced by the growing divergence between US markets and most of the rest of world. Obvious exception bieng Brazil which is up strongly since the assassination attempt and ultimate election of "Trump of the Tropics"!

Did you ever notice that when oil prices drop, the cause is overproduction by OPEC and non-OPEC countries. It happens every time. Once the Big Boys, who depend on oil revenues to run their dictatorships, get a taste of this, steps are quickly taken to get the price back up again. This time it's a little different now that the U.S. can bring on high volume production quickly to take advantage of high prices. We have more leverage, so to say.

The biggest mistake OPEC made in the last few years was to try to run up production (and artificially drop the price of oil) to shut down the U.S. shale guys. OPEC didn't read that right as our oli companies responded by drilling more with lower cost wells and fat budgets.

This time it will be interesting as someone (or maybe more than one) will have to cut production to get the worldwide Brent price over $70 US as that seems to be the comfort zone.

It's a delicate balance with this commodity as many countries are heavily dependent on their oil revenues.

 

[NW-Bound]

A drop in oil price often reflects a slowing economy, or one expected to slow, which is bad for equities in general...

There is a fear on Wall Street (justified or not) that lower oil prices could point to a worldwide economic slow down as evidenced by the growing divergence between US markets and most of the rest of world...

Did you ever notice that when oil prices drop, the cause is overproduction by OPEC and non-OPEC countries...

Yes. If the price drop is due to oversupply, it is not bad. If it is due to demand dropping (global economy slow down), it is not good.

So, what is it? Anybody has any number?

 

[NYEXPAT]

Did you ever notice that when oil prices drop, the cause is overproduction by OPEC and non-OPEC countries. It happens every time. Once the Big Boys, who depend on oil revenues to run their dictatorships, get a taste of this, steps are quickly taken to get the price back up again. This time it's a little different now that the U.S. can bring on high volume production quickly to take advantage of high prices. We have more leverage, so to say.

The biggest mistake OPEC made in the last few years was to try to run up production (and artificially drop the price of oil) to shut down the U.S. shale guys. OPEC didn't read that right as our oli companies responded by drilling more with lower cost wells and fat budgets.

This time it will be interesting as someone (or maybe more than one) will have to cut production to get the worldwide Brent price over $70 US as that seems to be the comfort zone.

It's a delicate balance with this commodity as many countries are heavily dependent on their oil revenues.

I am not disagreeing with your post. I just do not understand what it has to do with what I posted? My post was in reference to stock markets around the world and the extreme divergences we have seen this year.

 

[Popeye]

Yes. If the price drop is due to oversupply, it is not bad. If it is due to demand dropping (global economy slow down), it is not good.

So, what is it? Anybody has any number?

https://www.iea.org/oilmarketreport/omrpublic/

Check out this page for global demand. They discuss supply as well. Lots of variables so draw your own conclusions.

 

[revhappy]

A large part of my networth (60%) is denominated in Indian rupees. So lower oil prices is good for me. If oil crosses 80, it will be disastrous. Brent at 60 is like perfect.

 

[street]

I have worked with the oil industry companies for many years when I was working. I have yet to trust any of the big boys in the industry. Oil business is a crooked business lying, cheating and stealing under the table type of business.


US drillers blame everything on OPEC but are as much or more to blame for the problems in the industry. Oil companies have the US Gov. right by the shorts.

 

[corn18]

in 2017, the top 25 oil and gas companies on the Global 2000 generated $2.2 trillion in sales and pocketed $73 billion in profit. 3.3% ROS is not a good. The biggest company, XOM is king of the hill with $237B in 2017 revenue and $19.7B profit, or 8.3% ROS. That's better, but not stellar. Very capital intensive operations so their ROIC is also not the best.

Still, I don't mind lower oil prices vs. higher. Forces big oil to find efficiencies.

 

[Chopper]

My view is so different it might get ugly. Blame your stupid selves, quit driving just to get out of your trailer.
I originally worked in city management and people from trailer parks/inner city were 70% of ticketed drivers, most were driving for a fun day out.

So, my solution?
Issue commercial drivers a 50% discount card, commuters card to pay full price, joy rider 150%. Get the Valium creeps, drug moms, soap opera slugs, drunk unemployed men, etc off our streets.

Notice CNN reports of horrific wrecks, all joy rider, drugies, drunks.

US could easily be self sufficient.

 

[CaptTom]

Interesting article which is sort of related to my OP:

Opinion: Why stock investors should want higher oil prices

It's mostly a fluff piece (aren't the all?) but still gives a very brief overview of the relationship between stock prices and oil prices.

I don't think it does anything to negate my contention that, in normal times, relatively higher oil prices are a drain on the overall economy. The stock market may or may not respond the same way, for many reasons. The last line sums it up pretty well:

In the meantime, both bulls and bears need to look elsewhere than oil’s price for compelling stories about what the stock market has in store.

In other words, a dramatic change in oil prices CAN impact stocks, but other forces are in play, and less dramatic changes will have less impact.

To that I'd add that stock prices aren't the only measure of "good" or "bad" economic conditions. Since I'm using the traditional "three-legged stool" model, low inflation and low stock market returns maximize the long-term value of my fixed pension. So I'm not a huge fan of "growth," which to me only means "inflation." Although I don't want the bottom to fall out, for me personally, higher oil prices are always a bad thing.

 

[ponyboy]

Gotta love the fact that our planet relies almost entirely on a fossil fuel that will one day be gone.

 

[Breedlove]

Cheap prices could get bad for the overall workforce . Short term the drillers will drill baby drill . Rig rates will drop to get a job . Over all a glut could build that could cause heartburn to a lot of independent drillers and pumpers . Look at Weatherford today seems it is going down soon with cheap prices . Others will follow. Lots of these boys are working on a prayer. Lots people in the industry don't belong a way to purge.

 

[audreyh1]

Cheap prices could get bad for the overall workforce . Short term the drillers will drill baby drill . Rig rates will drop to get a job . Over all a glut could build that could cause heartburn to a lot of independent drillers and pumpers . Look at Weatherford today seems it is going down soon with cheap prices . Others will follow. Lots of these boys are working on a prayer. Lots people in the industry don't belong a way to purge.

Gluts usually happen when prices are higher, driving oil prices down. When prices are lower, less drilling occurs.