While we cheer the U.S. bull market’s 8-year anniversary, oil prices have broken below $50 a barrel after the U.S. Energy Department's weekly inventory release showed record high supplies and rise in production. In New York, West Texas crude settled at $48.40 per barrel yesterday, the lowest since late Nov.
What Triggered the Sell-Off?
The federal government’s Energy Information Administration (‘EIA’) report revealed that crude inventories jumped by 8.21 million barrels for the week ending Mar 3, 2017.
The analysts surveyed by S&P Global Platts (the leading independent commodities and energy data provider) had expected crude stocks to go up some 1.6 million barrels. A spike in the level of imports and production – now at a 1-year peak – led to the massive stockpile build with the world's biggest oil consumer.
Following the ninth successive weekly inventory rise, at 528.39 million barrels, current crude supplies are up 8% from the year-ago period and are at the highest level since the EIA began keeping records in 1982.
In particular, crude inventories at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – were up 867,000 barrels from the previous week’s level to 64.40 million barrels.
The rising U.S. oil production and inventory are starting to undermine the OPEC members’ surprisingly high level of compliance with the landmark production cut agreement signed late last year.
Investors Dump Energy Stocks
The federal data sparked widespread selling in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – down 3.7% over the past week. Even the broad-based Dow Jones Industrial Average and the S&P 500 index felt pressure from the sharp drop in crude futures, losing 0.94% and 0.76% for the week, respectively.
The two energy representatives in the 30-stock Dow Jones industrial average, Zacks Rank #3 (Hold)-rated ExxonMobil Corp. XOM and Chevron Corp. CVX were down by 2% and 3%. Meanwhile, the biggest casualties of the S&P 500 were Noble Energy Inc. NBL, Diamond Offshore Drilling Inc. DO and Devon Energy Corp. DVN, which slid 7.5%, 7.1% and 6.6%, respectively. In fact, such was the ferocity of the oil plunge that the nine of the ten worst-performing stocks in the index were all energy companies. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cheap Oil: An Economic Headwind
While the dramatic oil collapse is likely to benefit consumers and businesses by way of lower prices and thereby big savings in their fuel bills, the picture is not totally rosy.
As it is, cheap oil since mid-2014 has seen companies tighten their belts through capital expenditure cuts, contract renegotiations, layoffs and project deferrals. With market conditions getting tougher in the downturn, oil firms cut some 440,000 jobs globally (and approximately 150,000 in the U.S.) through the end of 2016.
The massive wave of job cuts started in early 2015 and encompassed all and sundry – integrated majors, upstream players, oilfield service providers, drilling contractors and equipment makers. From Schlumberger Ltd. SLB to Chevron Corp., and Transocean Ltd. RIG to ConocoPhillips COP, no company or sector was spared.
And when the oil industry was just starting to get back on its feet for the first time in three years and take advantage of prices going past $50 a barrel, a renewed slump has threatened the sector.
Will the Oil Slump Sabotage Trump’s Job Growth Plan?
Worryingly, with oil prices currently hovering around 3-month lows, President Donald Trump’s plans to boost job creation could be in jeopardy. His ambitious policy eyes a return to 4% per year economic growth and 25 million new jobs over the next decade.
By now, it’s a well-known fact that the new U.S. government is supportive of the energy industry in general with particular emphasis to rev up infrastructure spending. The main objective, obviously, is to champion the cause of jobs for American citizens and the oil sector is one of his main platforms to achieve this.
But the oil producers can increase spending and add jobs only if the commodity price is high enough to cover costs. At sub-$50 oil, this is not possible. Moreover, unless crude prices pick up, the companies won’t hike production and deal a blow to another of Trump’s election promises – i.e. to reduce dependence on imports and make “America energy independent.”
Therefore, from now to the day the White House is planning to submit President Trump's budget proposal to Congress, all eyes will be on the trajectory of oil prices. A revival in the fossil-fuel’s fortunes will underpin job growth, while another month of lackluster prices will severely dent Trump’s promise to add jobs.
Want to hear more about the recent dip in oil prices? Check out the latest episode of the Zacks Friday Finish Line Podcast:
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