You may be enjoying the economic benefits of petrol prices around £1.10 a litre, but last week investors were skeptical about the effect of low, low oil prices on companies’ performance during 2015.
For the first time since the financial crisis, the price of crude oil dropped under $50 a barrel last week. That’s less than half of its value just six months ago and one of the fastest drops in the past 30 years. Investors weren’t thrilled with the change. The Standard & Poor’s 500 Index (S&P 500) fell, marking the first time the index has moved lower during each of the first three days of a new year since 2005.
In the UK, Oxford Economics estimate that if oil falls to $40 per barrel in the near term, it could add 0.6pc to the UK’s GDP growth in 2015, when the economy is already expected to be one of the world’s strongest performers. Analysts are not ruling out further declines, possibly to as low as $35 per barrel. It could also ease the pressure on George Osborne, the Chancellor, to fund pre-election tax giveaways, provided that fuel savings are passed on to the public quickly.
Barron’s described the effects of lower oil prices like this: “In the U.S. alone, oil’s precipitous drop has had a sizable impact on expectations for corporate profits: Analysts have cut their fourth-quarter earnings forecasts for S&P 500 energy stocks by more than a quarter since the end of September while total S&P 500 earnings forecasts have come down by more than 7%… But here’s the thing: Such plunges haven’t been bad for stocks – or the U.S. economy, for that matter. Since 1984, oil has experienced three similar drops and each time the S&P 500 traded higher 12 months later.”
Investors were plagued by mood swings last week. Their outlook improved when the Chicago Fed’s Charles Evans indicated Fed rate hikes shouldn’t start until 2016, which is later than consensus suggests. Many analysts believe the Fed will begin tightening monetary policy (by raising the Fed funds rate) sometime in mid-2015. Investor optimism was tempered when Friday’s employment report didn’t deliver as expected. At the end a volatile week, the S&P 500 was lower.
Across the pond, European Central Bank (ECB) staff presented various models for buying 500 billion Euros of investment-grade debt during 2015. No commitment was made, but expectations the ECB might introduce fresh stimulus measures in late January helped push European government bonds lower.
The price slump continued to have an impact on the FTSE 100 oil stocks, with BP shares down 20% in the session and by more than a fifth in the last year.