Since summer, crude oil prices have dropped 25% as supply has far outstripped demand. On Thursday alone, oil prices tanked nearly 4%, dropping below $75 a barrel for the first time since 2010, on fears OPEC wouldn't inhibit its production in the face of a global supply glut. The commodity market's freefall hit oilers hard, with Chevron (CVX) , Exxon Mobil (XOM) and Hess (HES) collectively losing around $5.7 billion market cap in just one trading day.
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The timing isn't good for the Keystone XL Pipeline, the bill for which was passed in the House of Representatives Friday with 252 votes to 161. A Senate vote is scheduled for Nov. 18. The value of the project, proposed to run between Alberta, Canada and the Gulf Coast of Texas, has been undercut as crude production margins are squeezed.
For consumer discretionary stocks though, sliding oil prices could portend holiday cheer. Economists hope the falling prices at the pump will translate to a loosening of purse strings.
"Four years ago when Americans last devoted less than 10% of total spending to gasoline stations, the cost of gasoline was just $2.73," Interactive Brokers chief market analyst Andrew Wilkinson wrote in a note. "The current cost according to AAA is $2.92, which bodes well for holiday sales ... Lower gasoline prices appear to have inspired consumers to spend more elsewhere."
The timing is perfect for the retail sector given the holiday shopping season typically accounts for around a third of annual sales. Down-and-out retailers such as J.C. Penney (JCP) and Sears (SHLD) are particularly in need as fickle customers defect to online or are only lured with massively-discounted items.
Consumer spending excluding volatile items such as gasoline, autos and food services increased 0.5%, the biggest jump since August and above an expected 0.4% increase, according to U.S. Census Bureau data released Friday. Department store sales continued to drop, though, down 0.3% month on month and 3.5% for the year.
"We've been waiting for the consumer to come back into the marketplace," Hennessy Funds' Brian Peery said over the phone. "Now with gas prices dropping downward, you really start to see some discretionary income coming back to the middle-income and low-end consumer who now have the ability to spend a little bit coupled with an increase in jobs."
Consumer sentiment in November spiked to a seven-year high as better labor market conditions and lower gasoline prices boosted optimism. The preliminary reading came in at 89.4, its highest level since mid-2007, according to the Thomson Reuters/University of Michigan survey. Economists had expected a reading of 87.5.
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