Forget about oil and water not mixing, these days for investors oil and stocks don't mix. The near direct correlation between equity markets and the price of oil has far too many confused, perplexed or just pulling an ostrich and sticking their heads in the dirt. Let's help explain and simplify this new phenomenon.Lower energy prices are a boom for consumers plain and simple.
For most businesses these same lower energy costs are a savings dropping right down to the bottom line as well. Hugely positive.Now the elephant in the ointment. All oil and gas producing companies and countries are getting absolutely pole axed by the collapse in energy. Exploration and production companies can cut capital expenditures and head count to help ease the pain.
Many of these companies during the explosion of US production due to hydraulic fracking and improved technology took on massive debt loads to purchase attractive drilling properties. With oil at $100 a barrel, no problem.At $30 a barrel, ouch. We're not done.
Major energy exporting countries such as Saudi Arabia, Russia etc., already owned the land so that's not the issue. Oil revenues were the primary sources of these countries funding for their annual outlays and budgets. They are running into similar problems. Many of these exporting nations budgets were set based upon oil pricing $100 a barrel, no problem as long as oil is around that $100 level.With oil at $30, ouch. These same exporting countries ran sizable surpluses over the years and utilized these $100's of billions of profits to invest in foreign assets through their sovereign wealth funds.
Again, now with oil around $30 those surpluses become deficits.In order to plug government deficits those natural buyers of assets have become net sellers. We're talking about again 100's of billions of dollars of assets (stocks, bonds, real estate, hedge fund shares, private equity funds) up for sale putting continuous pressure on near all asset classes. This is a major issue that will continue until oil finds a bottom and or there is a response from Federal Reserve Chairwoman Yellen. If recent history serves us we certainly should not expect our elected officials to think of the country first and build consensus for a policy response instead of worrying more about caucuses and elections. No, speeches about building walls to keep people out or stealing the money of successful savers and/or business-persons through higher taxes is much more effective economic policy response or at least what we can anticipate.
