The price of oil has dropped from over $100 last year to $44.51 today.
Yesterday, it was reported that gasoline stockpiles in the United States surged just at the end of the summer driving season. This reduces demand from refiners and puts further pressure on producers.
Exxon Chief Executive Officer Rex Tillerson is one of the consistent smart guys in the oil industry. He saw the rout coming last year and cut expenses 9.3%. This year, he has slashed 12% from the budget.
According to Bloomberg:
On April 21, he told a Houston energy conference that the supply glut and low prices will persist “for the next couple of years” at least.
Some companies that burn a lot of oil have done very well. Carnival Corporation (NYSE: CCL), for example, launched more than 10% last week on blowout earnings.
But many big-named Wall Street traders didn’t see oil below $100. WTI under $50 means that $1.3 trillion in paper wealth has evaporated. That’s equal to the GDP of Mexico.
Carl Icahn saw his $2 billion worth of Chesapeake Energy Corp. turn into $0.7 billion. Chesapeake has been the worst performer in the Standard & Poor’s 500 Index this year.
California Public Employees Retirement System, meanwhile, lost $40 million in Pioneer Natural Resources.
Cheap Oil is Good
Despite what the folks at the Federal Reserve say, deflation is good for most people.
It is obviously better to get more for your money than it is to see your money erode from inflation. It takes a PhD in finance from the Wharton School coupled with years in Washington and on Wall Street to see this as bad.
Companies are setting up factories in the U.S. due to a highly productive workforce and low energy prices.
A study by the Reshoring Initiative shows that 60,000 manufacturing jobs were brought into the U.S. by a combination of reshoring and foreign direct investment (FDI) in 2014, a record level and a 400% increase since 2003. For the first time in decades, this is more than the 30,000 to 50,000 jobs that left last year.
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Low-priced oil is also good for drivers and sellers of large trucks. Ford (NYSE: F) makes the iconic F-150. The company’s sales were up 4.9% in July — the best in nine years.
The company lost market share because it can’t produce cars fast enough. Two of the company’s plants are at full capacity. Its annual summer factory shutdown was cut short to boost the production of the new aluminum F-150.
Inventory at the dealers is half of what it was a year ago. Look for sales to jump over the next two quarters as these trucks are restocked.
Large consumers of oil that benefit from cheap input costs are chemical companies, travel/airline companies, and perhaps the most unlikely winner: paint makers.
The Sherwin-Williams Company (NYSE: SHW) has gone from $174 to $274 over the past two years.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
