Stocks have continued their tumultuous ride, and maybe none more so than energy stocks.
The price of oil and energy stocks have been down sharply over the last month.
Carl Carlson, CEO of Carlson Financial said, the stock market downturn and the steep price drop of oil are actually a lot less correlated than people think. High oil prices can lead to an increase in jobs and investment in the oil & gas sector, but low oil prices can mean lower transport costs for many other industries and more money left in the consumers pocket. So whatever the price of oil is, there are always winners and losers, and either way isn’t necessarily bad for stock markets.
The main thing that really drove oil prices down is a price war between Saudi Arabia and Russia, Carlson said. They had been trying to work out a deal to manage oversupply in the marketplace, but it did not go as hoped. Russia did not agree to slow production and in turn, Saudi Arabia said they would discount their prices and increase production. What we’re seeing is very high supply, which leads to very low prices. Unfortunately, recent events with the coronavirus have simultaneously impacted demand, as there are far fewer people traveling and transporting. We have a bad combination with high supply and low demand.
With prices so low, some have heard it might not make sense for companies to continue drilling here in the U.S. and that some may be closing their refineries as well.
Carlson said we should not be worried about supply. If companies were to cut back on production, all it would take is for demand to pick up, prices to rise a little bit and they could continue drilling and refining oil at a profitable rate. There are actually companies that use satellite imagery to try and estimate how much oil is in storage in above-ground facilities, and it appears there is approximately 75 million more gallons in storage right now that at the same time last year, Carlson said.
He added, we might see prices level out soon if they find their equilibrium under the “new normal,” is that exists.
Low prices may last awhile if nothing changes, but there’s also talk of the U.S. maybe intervening to help Russia and Saudi Arabia come to terms.
Investors have been very uneasy since the spread of COVID-19 and it seems like they are looking for any sign of markets heading into a longer-term recession, Carlson said. Low oil prices don’t indicate that, and remember, low costs will be beneficial for other companies that are otherwise hurt by the downturn in this economy, such as airlines.