What is going on with the oil markets?

November 26, 2014

A popular topic of recent has been the precipitous decline in the price of crude oil. Prices are at a four-year low and Brent Crude oil is trading around $77 per barrel. At times, the technical terms surrounding global energy prices can be confusing. However, to most of us, the bottom line is; how does this impact the price of gasoline when I fill up my vehicle?

 

 

Note: Brent crude oil, extracted from the North Sea in Europe, has become the major benchmark for global oil prices. Overtaking WTI Crude Oil in recent years, Brent Crude is a more widely used input.

As some background, let’s first take a look at why global prices have been on the decline. On the demand side, the global slow-down outside of the U.S. has crimped consumer spending in areas that utilize oil input, such as travel and consumer goods. In Europe and China, two very large oil consuming markets, economic growth has shown weakness and thus, less demand for the commodity. Secondly, production and output has been on the rise. In the U.S., production has been on a steep incline since the trough of September 2008.  Production then was approximately 120k barrels for the month, whereas in September of 2014, the U.S. produced 265k barrels.  Furthermore on production, output has not been disrupted in the middle-east despite the turmoil and violence. Of recent news, OPEC is set to meet in a few days, and markets are not expecting them to cut oil production in the near future.

 

 

 

The translation of lower crude oil into lower retail gasoline prices is not a 1-for-1 correlation. There are other inputs and factors (taxes, distribution/marketing costs, and refining) that influence the price at the pump.  As such, though crude has declined more than 30% since June, U.S. retail gasoline prices have declined 23%. 

 

 

In conclusion, the growth slow-down is impacting global energy prices.  If prices are to remain depressed for a sustained time period, we may see an up-tick in consumer spending as household budgets improve due to less gas and energy expense. Furthermore, the lower energy prices may translate into cheaper prices for certain goods that either use oil or petroleum as an input, or those that benefit from cheaper transportation costs.

 

Sincerely,

Cory Nakamura CFA, CFP®

Chief Investment Strategist and Financial Advisor

 

CFA Charterholder

CERTIFIED FINANCIAL PLANNER™ professional

Honolulu|Hawaii

 

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