Tuesday, December 16, 2014

Crashing crude may blow a $1.6 trillion hole in the global oil sector, annually

NEW YORK (MarketWatch)—Talk about an oil spill. The spectacular unhinging of crude oil prices over the past six months is weighing mightily on the U.S. stock market.

And while it may be too early to abandon all hope that the market will stage a year-end Santa rally, it appears that if Father Christmas comes, there’s a good chance his sleigh will be driven by polar bears, instead of gift-laden reindeer.

Wall Street’s gift: a major stock correction.

Indeed, the Dow Jones Industrial Average DJIA, +0.00%  already endured a bludgeoning, registered its worst percentage decline since Nov. 25, 2011, down 677.96 points, or 3,78%. It was also the worst week for the S&P 500 SPX, -0.70% on a percentage basis since May 18, 2012. The S&P 500 was down 73. 04 points and 3.52% on the week.

But all that carnage is nothing compared to what may be in store for the oil sector as crude oil tumbles to new gut-wrenching lows on an almost daily basis. On the New York Mercantile exchange light, sweet crude oil for January delivery settled at $57.81 on Friday, its lowest settlement since May 15, 2009.

Moreover, the largest energy exchange traded fund, the energy SPDR XLE, +1.19% is off by 14% over the past month and has lost a quarter of its value since mid-June.

The real damage, however, is yet to come. By some estimates the wreckage, particularly for the oil-services companies, may add up to a stunning $1.6 trillion annual loss, at oil’s current $57 low, predicts Eric Lascelles, RBC Global Asset Management chief economist.

Since it’s a zero-sum game, that translates into a big windfall for everyone else outside of oil players.
In his calculation, Lascelles includes the cumulative decline in oil prices since July and current supply estimates of 93 million barrels a day. It’s a fairly simplistic tally, but it gets the point across that the energy sector is facing a serious oil leak. Here’s a look at a graphic illustrating the zero-sum, wealth redistribution playing out as oil craters:
RBC Global Asset Management/MarketWatch
It’s important to note that Lascelles believes that the downdraft in oil is largely a positive. The economist also believes that oil sector’s pain will be confined mostly to the energy sector.

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