By Ben Dickey Oil prices have broken through most of the technical support levels on the way to the mid-$70s, per-barrel price range in recent weeks. This has put more money in the pockets of consumers but has driven stock prices down on most energy and production (E&P) companies, even to a larger degree than the drop in oil prices would warrant in my opinion.
Most companies that are producers have hedges in place for a large percentage of their production. For the next few quarters the price drop should not affect earnings dramatically in my opinion. However if prices remain this low for an extended period of time, it will affect profits and will eventually slow drilling. In my opinion, oil prices should not stay at these levels for an extended period of time. Foreign governments that rely on oil production to balance their budgets cannot tolerate these lower prices for more than about six months of time. Some of the price decline can be attributed to the rise in the value of the U.S. dollar. Since commodities are priced in dollars, as the dollar rises, it takes fewer of them to buy them. The prices of gold, platinum, palladium, copper, and nickel have all fallen this year. As other economies improve, their currencies may possibly appreciate against the dollar allowing prices on all commodities to increase.
U.S. refineries have been in their semi-annual shut down mode in order to perform routine maintenance and to switch from summer blends to the winter blends. At this time they also modify their process to produce more diesel fuel (heating oil) than gasoline. They are just about finished with this changeover. The fall and winter production cycle for refined products will consume more oil than the summer season, which should help to stabilize prices.