The news according to The Wall Street Journal is that stocks climb as oil prices stabilize. Has the price of oil stabilized and if so what does that mean for stock prices and the U.S. economy?
“Oil and high yield have been all anybody wants to talk about,” said R.J. Grant, associate director of equity trading at KBW Inc., who added that modest gains in the price of oil on Tuesday helped boost stocks.
In day-to-day trading, a key barometer of whether stocks can sustain gains has been the price of oil, traders said. On Tuesday, U.S. oil prices climbed 0.9% to $36.14 a barrel following steep declines in recent weeks. The price of oil remains down more than 32% for the year.
“If we see continued stabilization there, maybe we will get a lift into the new year for stocks,” Mr. Grant added.
Because the energy sector is a significant part of the stock market higher oil prices mean higher stock prices, on the average. However, the low price of energy has been a boon to many parts of the economy and higher oil prices will increase the cost of doing business across the board. In short, stabilized or higher oil prices will help some stocks and hinder others. How long will oil prices remain at the current level and will they recover to higher levels in the foreseeable future?
What Does OPEC Say?
The Organization of Petroleum Exporting Countries supposedly sets the price of oil by controlling supply. Many in OPEC want lower production in order to raise prices and Saudi Arabia refuses, thus keeping supplies high and prices low. However, a recent OPEC report suggests a rebound of oil prices after a supply cut according to the Journal.
OPEC on Wednesday predicted oil prices will rebound in coming years,and the cartel said it expects to reduce its own production by 2019.
The report comes after global oil prices this week fell to levels not seen since 2004 amid an increasing glut.
In its closely watched annual World Oil Outlook published Wednesday, the Organization of the Petroleum Exporting Countries said it expects the price of its basket of crudes to rise to $70 a barrel in 2020 and $95 a barrel in 2040, compared with $30.74 a barrel on Monday.
However, not all OPEC members will go along with a production cut. They may want the others to do so but nations like Iran and Venezuela are hurting for foreign currency reserves and will probably not cut back. It will depend primarily on the Saudis to reduce supply. Now, how about demand?
Demand for Oil and the World Economy
When the economy is humming along consumption of oil goes up as does the price. And when the economy goes into a slump so does the demand for oil and the price, which is what is happening now. Has the price of oil stabilized or is it going up? Which nations are the drivers of the world economy and users of oil and how are they doing? Oil consumption by country is as follows according to Exploration World.
- USA, 19 million barrels per day
- China, 10.4 million barrels per day
- Japan, 4.53 million barrels per day
- India, 3.66 million barrels per day
- Russia, 3.49 million barrels per day
- Brazil, 3 million barrels per day
- Saudi Arabia, 2.96 million barrels per day
- Canada, 2.33 million barrels per day
- Germany, 2.4 million barrels per day
- South Korea, 2.34 million barrels per day
China is the second ranking user of crude oil and its economy is slowing. Japan is number three and flirting with recession. India is doing the best of the BRIC nations while Brazil, Russia and China are having problems. It is not likely that a huge economic rebound will drive up the price of oil next year so stabilized or higher prices will depend on the Saudis and whether or not they lower production.