Articles tagged with: Russia

What Affects Oil Prices

While doing your holiday shopping this year, you may have noticed something strange going on. Suddenly, you had more money to spend than you did this time last year. A Christmas miracle? Perhaps, but more likely it’s due to the massive drop in oil prices.

Even if you didn’t do any shopping, you’ve probably noticed that prices at the pump are lower than they’ve been in years. Consumers all over the country are rejoicing in fact that filling up their care isn’t quite as emptying on their wallet. My clients have been no exception, but they’re also wondering, “Why?”

It’s a great question. Why exactly are oil prices falling? And what does it mean for the markets?

Read on to find out.

Oil prices 101

Contrary to popular belief, the price of oil isn’t set by any one man or entity. Oil prices are dictated by two things: the law of supply and demand, and by the expectation of future supply and demand. The former is fairly easy to understand. When the demand for oil is greater than the supply, the price rises. Conversely, when the supply of oil is greater than the demand for it, prices drop. This is partially what’s happening now. Partially.

You see, current supply and demand is not the only thing driving oil prices. As I mentioned, expected supply and demand plays a large role, too. In this case, when the expectation is that future demand will decrease, oil prices fall as a result.

Who sets these expectations? Speculators. A speculator is defined as:

“A person who trades derivatives, commodities, bonds, equities or currencies with a higher-than-average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.”1

Basically, speculators are a special breed of investors who try to project whether the value of a commodity will rise or fall in the future, then either buy or sell that commodity accordingly.

In this case, speculators felt earlier in the year that the demand for oil would drop for several reasons:

  • The continued economic weakness around the world means less people are traveling or commuting, meaning they are spending less on gasoline.
  • While oil is still the world’s primary fuel source, more people and businesses are turning to other forms of energy.
  • The supply of oil would remain stable or even increase.

This last point is important. Several of the various oil-exporting nations around the world could still take steps to raise prices if they wanted to.   How? By cutting back on their own production. (Remember, when supply goes down, demand goes up, thus raising prices.) But none of these nations are taking the bait. The two main players are Saudi Arabia and Russia. Saudi Arabia is the most influential member of OPEC, the Organization of Petroleum Exporting Countries. Saudi Arabia has refused to cut oil production despite the fact that the world’s supply far outpaces the demand for it. Why? Because if oil prices were to rise, it would benefit several of Saudi Arabia’s main competitors, especially the United States, Russia, and Iran, who all need higher prices to turn a profit. Saudi Arabia, on the other hand, can survive on lower oil prices because of their massive cash reserves, and because extracting oil is far less costly for them. This means that lower oil prices harm their competitors while leaving them unscathed, allowing them to dominate more of the market.

Russia has also refused to cut production, despite the fact that falling prices is severely hurting their economy. (More on this in a moment.) Russia reasons that if they cut production, the countries they normally export to would increase their own production and have no need for Russian oil in the future.

So there you have it: a few reasons why oil prices have fallen so dramatically. But what does the future hold? And what does this all mean for the markets?

How Falling Oil Prices Affect the Markets

As you already know, falling oil prices means lower prices at the gas station. But oil prices aren’t the only thing dropping.

When the price of oil falls, it takes everything dependent on oil prices with it. Take Russia, for instance. Some economists estimate that Russia loses about $2 billon in revenue every time the price of oil drops by a dollar. That’s because the sale of oil and gas makes up 70% of its export income.2 This in turn affects the value of the ruble, Russia’s currency, which is veering on the edge of collapse. A falling ruble, meanwhile, hurts bonds and other positions investing in emerging markets, of which Russia is one.

Closer to home, falling oil prices makes life harder for energy companies and companies closely aligned with the energy industry. The result: falling stock prices, which leads to market volatility as a whole. The United States markets got a taste of this in early December. Oil shock hit Canada even harder, thanks to the sheer number of Canadian energy companies trading on the markets. In this global economy, economic stress in one region usually leads to a tremor in another. And one person’s good fortune can be another’s bad luck.

But Here’s the Good News

With that said, I believe the overall impact of falling oil prices is a positive one. Whether you’re at the pump or paying your monthly heating bill, the numbers have to make you smile.

For the most part, spending less money on energy consumption is a good thing! It’s good for consumers and it’s good for the overall economy. After all, less money spent on gas means more spent on other goods and services, thereby pumping additional money into other sectors of the economy. This creates a kind of “rising tide that lifts all boats” effect.

The volatility I mentioned earlier has largely subsided as investors get used to the idea of cheaper oil. Since then, the markets have been surging. As of this writing, the Dow has topped 18,000 for the first time in history, and the S&P 500 is trading at an all-time high as well.3 Investors are realizing that the money they aren’t spending on gas can be put to good use. Furthermore, the United States’ overall economy is looking healthier, having grown 5% in the third quarter.4 And the holiday season—the “Santa Claus” rally, as some call it—is almost always a wonderful time for the markets. The end of the year looks to be a good one.

Where Does Oil Go from Here?

It’s almost impossible to know for sure what oil prices will do in 2015. There are just too many factors in play—economic, environmental, and geopolitical. (Friendly tip: if you are ever looking for an effective sedative, just start reading crude oil forecast reports. Works like a charm.) That said, most of the estimates I’ve seen suggest prices will likely rise somewhat in 2015, but remain far below what they were in early 2014 when oil was selling for over $100 a barrel.5 That means cheaper oil for the immediate future. To celebrate, I want you to do two things for me:

  1. Enjoy cheap(er) gas for as long as it lasts! Maybe go on that road trip you’ve always wanted to take … just don’t forget to send me pictures!
  2. Remember that my team and I are always watching the markets—and your portfolio—carefully. If we see any major developments, we’ll certainly let you know.

Understanding the ins and outs of oil prices can be difficult even for those who do it for a living. I hope this made the situation a little clearer! But if you have any questions about this or any other topic, please don’t hesitate to let me know. I always enjoy hearing from you.

On behalf of all of us here at Cornerstone Financial Group, have a Happy New Year!

Mike Moffitt may be reached at 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The fast price swings in commodities will result in significant volatility in an investor’s holdings.

Resources:

1 “Definition of Speculator”, Investopedia.com, accessed December 19, 2014.http://www.investopedia.com/terms/s/speculator.asp#axzz1qtKjMwIt

2 Tim Bowler, “Falling oil prices: Who are the winners and losers?” BBC, December 16, 2014. http://www.bbc.com/news/business-29643612

3 Jesse Solomon, “Dow hits 18,000 for first time ever,” CNN Money, December 23, 2014. http://money.cnn.com/2014/12/23/investing/stocks-markets-dow-18000/

4 Matt Egan, “US economy grows incredible 5%,” CNN Money, December 23, 2014. http://money.cnn.com/2014/12/23/news/economy/us-gdp-economy-5-percent-growth/

5 “Short-Term Energy Outlook,” U.S. Energy Information Administration, December 9, 2014. http://www.eia.gov/forecasts/steo/report/prices.cfm

 

 

 

 

China, Ukraine & the Markets

Dow drops again, analysts wonder. March 13 saw another triple-digit descent for the blue chips – the Dow Jones Industrial Average plummeted more than 230 points, the second market day in less than two weeks to witness a loss of 150 points or greater. The S&P 500’s (small) YTD gain was also wiped out by the selloff. As the bull market enters its sixth year, it faces some sudden and potentially stiff headwinds, hopefully short-term.1,2

In Ukraine, the situation is fluid. As the trading week ended, much was unresolved about the nation’s future. The parliament of its autonomous Crimea region had announced a March 16 referendum, which gave voters two options: rejoin Russia, or break away from Ukraine and form a new nation.3

Ukraine’s government calls the referendum unconstitutional. The United States and key European Union (EU) members agree and claim it violates international law. Russia welcomes the vote – 60% of the Crimean Peninsula’s population is made up of ethnic Russians, and Russian troops more or less control the region now.3

Russia wants the real estate (its Black Sea naval fleet is based on the Crimean Peninsula) and could spread its economic influence further with the annexation of that region. The cost: economic sanctions, probably harsh ones. Should diplomacy fail to stop the secession vote, then Russia can expect “a very serious series of steps Monday in Europe and [the United States],” according to Secretary of State John Kerry.3

So far, the moves have been largely symbolic: a suspension of the 2014 G8 summit and the talks on Russia’s entry into the OECD, and asset freezes for individuals and companies deemed to be hurting democracy in Ukraine. Additional “serious” steps could include financial sanctions for Russian banks, an embargo on arms exports to Russia, and the EU opting to get more of its energy supplies from other nations. Russia could respond in kind, of course, with similar asset freezes and possible pressure on eurozone companies doing business in Ukraine. The fact that Russia has already staged war games near Ukraine adds another layer of anxiety for global markets.4

Investors see China’s growth clearly slowing. Its exports were down 18.1% year-over-year in February. Analysts polled by Reuters projected China’s industrial output rising 9.5% across January and February, but the gain was actually just 8.6%. The Reuters consensus for a yearly retail sales gain of 13.5% for China was also way off; the advance measured in February was 11.8%. These disappointments bothered Wall Street greatly on Thursday. The news also roiled the metals market – copper fell 1.3% on March 13, its third down day on the week.

Besides being the world’s top copper user, China also employs the base metal as collateral for bank loans.1,5,6

As Chinese Premier Li Keqiang noted on March 13, the nation’s 2014 growth target is 7.5%; the respected (and very bearish) economist Marc Faber told CNBC he suspects China’s growth is more like 4%. The upside, Faber commented, is that “4 percent growth in a world that has no growth is actually very good.”6

Will the bull market pass the test? It has passed many so far, and it is just several days away from becoming the fifth-longest bull in history (outlasting the 1982-7 advance). Bears wonder how long it can keep going, referencing a P-E (price-to-earnings) ratio of 17 for the S&P 500 right now (rivaling where it was in 2008 before the downturn), and the 1.9% consensus estimate of U.S. Q1 earnings growth in Bloomberg’s latest survey of Wall Street analysts (down from a 6.6% forecast when 2014 began).1

Then again, the weather is getting warmer and the new data stateside is encouraging: February saw the first rise in U.S. retail sales in three months, and jobless claims touched a 4-month low last week. Maybe Wall Street (and the world) can keep these signs of the U.S. economic rebound in mind as stocks deal with momentary headwinds.1

Michael Moffitt may be reached at 1-800-827-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and, securities are offered through LPL Financial, member FINRA/SIPC.  Investment advice offered through Advantage Investment Management, a registered investment advisor and a separate entity from LPL Financial.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

The Dow Jones Industrial Average (the ‘Dow’) is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – bloomberg.com/news/2014-03-12/nikkei-futures-fall-before-china-data-while-oil-rebounds.html [3/12/14]
2 – ajc.com/feed/business/stock-market-today-dow-jones-industrial-average/fYjPS/ [3/3/14]
3 – cnn.com/2014/03/13/politics/crimea-referendum-explainer/ [3/13/14]
4 – uk.reuters.com/article/2014/03/13/uk-ukraine-crisis-factbox-idUKBREA2C19L20140313 [3/13/14]
5 – cnbc.com/id/101492226 [3/13/14]
6 – cnbc.com/id/101489500 [3/13/14]