By Banu Simmons Oil prices continued to slide in October. Brent crude futures fell below $85 per barrel after trading as high as $115 in June, even as the risks of disruptions to the oil supply seemed unlikely. Despite the hammering oil prices have taken in the last five months, it is unlikely that OPEC will cut production in my opinion.
As OPEC’s oil production costs are relatively low, only half of shale output, the companies that operate in shale production may suffer more if the price remains low due to weak demand. Such industries as construction, chemicals, machinery, steel, mining and utility stocks have a positive coefficient with the oil price growth, according to my research. That's a fancy way of saying these industries are sensitive to price swings in oil. Information technology stocks are neutral to the effect of the oil price. Many other sectors (autos, banks, building materials, food, household goods and retail) have a negative coefficient on the oil price change. In other words, in the long run lower energy costs are a plus.
Retail stocks may get a special boost. Lower heating and transport costs affect household disposable income in a favorable way by increasing demand for consumer goods. Moreover, lower transport costs are favorable for retail stocks with tight profit margins. Looking ahead, if global slowdown deepens, it is important for US consumer spending to be a pillar of economic growth given that the strengthening dollar may hurt exports.
Last month has seen a big jump in the CBOE volatility index (VIX) almost doubling its September values alongside the market sell-off in the first half of October. Recently the index has fallen but it still remains above its September level. Other than the usual geopolitical risks and Ebola pandemic, signs of a global economic slowdown have rattled the markets.