Aurum Wealth Management Blog

Don’t Be Crude

Just a few years ago the theory of “Peak Oil” was making the rounds, that the world would reach a point in the not so distant future that oil reserves would deplete rapidly, sending crude oil prices to the moon.  Fast forward a few years and the shale revolution in the U.S. brought a glut of supply onto the market, combining this with a secular decline in demand (along with several other factors we can only speculate) caused an oil price crash.

Food and energy are relatively inelastic purchases by households.  Regardless of price, households must consume these items.  Since energy and food comprise a higher share of income for lower income households,  a lower price at the pump will increase the marginal propensity to consume other goods and services.  Note the jump in sentiment in the bottom third household income tercile (red line) the last few months coinciding with the decrease in gas prices.

University of Michigan Consumer Sentiment Survey

Gas prices are the lowest since 2010, a welcome development.  It will be a net positive to gross domestic product with economists estimating a contribution 0.2% to 0.5% to growth in the fourth quarter.

This turns into analysis on inflation, or the lack there of, and the assumption that measures of inflation will fall.  However, it simply is not true, at least for the measure that matters for the Federal Reserve.  The Fed takes a long-term view with its monetary policy and will be looking at the “Core CPI (Consumer Price Index) excluding food and energy.”  The below scatterplot shows no linear relationship between the change in oil prices and the change in core CPI the following year. It does not impact the current year either.

The lower prices are affecting the big exporters negatively. Many countries will be forced to run a deficit if oil prices stay below the breakeven levels and especially if the decline continues.

Source: UBS, Credit Suisse, Bloomberg, Reuters, IMF, J.P. Morgan Asset Management.

Expectations for earnings growth for the energy sector over the next twelve months are now -8.4% and were only lower in 2008, 2004, and 2002.  In contrast, the sector grew earnings at a positive rate in over 90% of rolling 5-year periods in the last 20 years.  There will definitely be companies that need restructured if the price of oil persists at these levels, yet there will also be winners who weather the storm.

For more information, please contact Aurum Wealth Management Group at 440-605-1900 or visit our website at To stay up to date with the latest investment-related news, follow us on Twitter @aurumwealth and sign up to receive our free newsletter.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

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