Is Weakness in Crude Oil and Energies Fuel for Stock Prices? Yes!

Crude oil has been falling and weaker energy prices, overall, has been helping to fuel the recent rally that we are currently witnessing in global stock markets.

Stocks soared higher yesterday. U.S. markets set new record closes with the DJIA closing above 17,600. This comes as crude oil futures continue to fall, targeting $70 per barrel. West Texas Intermediate traded at $77.40 at the end of yesterday’s session, and was weaker during Asian market hours. Natural gas has also tanked, by more than 3.5 percent, to $4.25 per million British thermal units. Energy prices are weak and getting weaker.

Weakening energy prices are more positive than negative. Here is why. Part of the weakening prices is deflation trade. It is hard to really determine why prices have fallen so sharply, but traders are reacting to slower global economic growth and demand for the black gold. We once saw interest rates falling and oil prices rising, now we have the opposite. Rates are rising and crude oil prices are falling. Traders are viewing weak energy prices as a mixed bag. It is good for consumers and not very good for oil producers. It will take a lot more of a drop to warrant a cutoff in U.S. oil production, but still, some producers are getting hurt.

Halcon Resource Group (HK: NYSE) has been seeing weaker Q3 profit results as the bottom line is being hurt by falling energy prices. Their stock is now down five percent after announcing they were closing half of their oil drilling rigs they plan to operate in 2015.

As prices continue to fall, we expect new drilling to be cut. While we do not expect U.S. production to be drastically effected unless oil crashes below $70, larger companies like the Chevron Corp. (CVX: NYSE) are already looking to cut costs to fix their shrinking bottom line.

The math tells us that with a 20 percent fall off in oil prices, capital expenditures, for the industry, will decrease by nearly $39.7 billion. However, savings for the everyday consumer will be around $70 billion. The benefit for the consumer will outweigh the problems for the energy sector. As energy sector spending slows, engineering and other ancillary industries will reap the rewards. This includes construction. The contribution from the energy sector to overall employment is very modest. This will mean the labor market, especially employment numbers, will not be impacted greatly.

For consumers, lower energy prices, means more money in the pocket and more money they will spend on big ticket items. This will help manufacturing output and retail sales. It will also reduce inventory and a reduction here spurs manufacturing. More manufacturing means more jobs… following? Also, another plus, as oil prices continue to fall, look for the margin of S&P 500 listed companies to improve. The average margin is currently at 9.9 percent and as energy prices continue to fall, the margin will only improve.