Oil may be turning into fuel for stocks

Cheaper energy prices may be turning into fuel for stocks, after initially being a drag.

Stocks punched through to another record high Monday even with slumping oil and gas prices sending shares of energy companies lower. West Texas Intermediate closed at $77.40 per barrel, after dropping $1.25 and natural gas futures skidding 3.6 percent to $4.255 per million British thermal units.

The Dow was up 39 points at 17,613, and the S&P 500 was up 6 points at 2,038. The S&P energy sector declined 0.8 percent.

Traders on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders on the floor of the New York Stock Exchange.

"Cheaper energy prices are more of a positive than they are a negative," said BMO Private Bank CIO Jack Ablin. "Part of it was the deflation trade. It's hard to know what it's reacting to. Weaker energy prices were sort of reacting to slower growth. I think what was happening was interest rates were declining as oil was dropping. It was part of a larger theme. Now oil prices are dropping and interest rates are rising."

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The market has looked at falling energy as a mixed blessing, a plus for consumers and energy sensitive industries and a negative for oil producers.

While analysts say it would take a much lower price to cut off U.S. oil production growth, some producers are already feeling the pain.

Halcon Resources Monday saw its stock fall by about 5 percent after it said it is cutting nearly half the rigs it originally planned to operate next year because of the steep drop in oil prices.

New drilling is expected to be the first area cut, and U.S. production is not expected to take a meaningful hit unless oil continues to drop and gets significantly below $70 per barrel. Companies like Chevron and Occidental said they are looking at their costs.

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Barclays analysts calculated that with a 20 percent decline in oil prices, capital expenditures for the industry should fall by $40 billion, but savings to consumers could amount to $70 billion.

"We believe the benefit to the consumer outweighs the negative implications for the energy sector," wrote the Barclays analysts. "Of energy-related spending slows, we recommend watching ancillary industries such as engineering and construction. Still the contribution of the energy sector to employment is modest, which should dampen negative consequences."

Randy Frederick, Charles Schwab managing director, trading and derivatives, said the oil price move was initially misinterpreted. "Oil prices impact oil companies but it has a postive impact on the consumer," he said.

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According to Frederick, rising prices could hurt production. "All of a sudden the cost to produce it makes it not viable, but I don't think we're there yet."

Ablin said producers will also resist closing in wells. "The producers are going to be really stubborn for a couple of reasons. They have a lot of fixed costs," Ablin said. "More important is a lot of these producers don't own. They lease. The way the lease agreements work is fi they don't produce, they could lose the lease."

"I think, in isolation, all things being equal, oil prices drop and the U.S. would be a net beneficiary," he said. He pointed out that margins of S&P 500 companies are at 9.9 percent and lower energy costs could help them get even better.

What to Watch

For Tuesday, there is the NFIB small business survey, but there is no other data. The bond market is closed for Veterans Day.