The benefits of low cost oil are yet to be felt
- Sunday, May 21, 2017
The price of equities should be determined by investors trading; instead they are currently driven by announcements from the Fed and the oil price.
We are now witnessing the remarkable link between equity prices and oil prices. The correlation between the S&P 500 index and Brent Crude price has almost reached 1. This close correlation really does not make sense as the overwhelming majority of global companies benefit from cheaper oil. There are far more oil consumers than producers. Traders are sticking with the view that lower oil prices signal slower demand and slower growth. However it is clear that the current low price is due to massive oversupply that falling demand.
The oil revenues of the all-powerful OPEC cartel have fallen from US$1.2tr to US$400bn at a Brent crude price of US$31pb. This amounts to a US$800bn transfer to the manufacturers, transporters and consumers of Europe, Asia and USA. This transfer of capital should be a global stimulus. Interestingly OPEC and non OPEC producers have so far not cut back on their own spending, instead they are dipping into their sovereign wealth funds to put off the pain of austerity.
The US consumer has not yet started spending this bonus having left it pilling up in bank accounts. This has pushed US household savings rates up from 4.5% to 5.5% over the last twelve months. Commentators think that sooner or later they will start spending.
Another factor expected to create demand for oil and push up oil prices is the demand in world markets from the USA. This is expected to kick in from Q3.
While investment thinking is currently focused on a generalised slow growth panic, the benefits of low cost oil are yet to be felt and may well come through later in the year.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.