Dropping Oil Prices: A Seasonal Symptom

Last week, oil prices experienced a rise for the first time in two months before sliding again yesterday. There is lot of concern in the energy patch that all of these energy companies have borrowed at really low rates and now that prices have collapsed, won’t be able to make ends meet.

There is obviously going to be some consolidation, but I wouldn’t worry too much. Why? Energy is a seasonal fuel and demand drops in the fall and goes up in the spring because there are more people in the Northern Hemisphere than in the Southern Hemisphere. This is a key fact that many people aren’t talking about.

But trust me, when springtime comes, we’ll be out and about a little bit more. And demand will go up, and then we’ll see where the high-end oil prices will go. Oil is obviously finding a new range. Whether the range is going to be $42 to $68, I don’t know. But we’re going to find out what that range is. Oil will firm up a bit here as demand goes up.

So enjoy the low gas prices right now; this might hinder Texas, Oklahoma, Louisiana, North Dakota some energy intensive states, but I do want you to know that consumer spending has responded magnificently.

The drop in energy prices is effectively a big tax cut for U.S. consumers. Retail sales are already booming thanks to falling gasoline prices. In November, retail sales jumped 0.7%, the biggest increase in eight months. Economists were only expecting a 0.4% rise in retail sales, so this was truly a surprise.

Clearly, when you put more money in consumers’ pockets, they spend it accordingly. Retail sales are now up 3.2% in the past 12 months. The University of Michigan/Reuters also recently announced that its consumer sentiment index surged to a preliminary reading of 98.2 in January, the highest level in 11 years. This bodes well for even stronger retail sales moving forward.

Beyond consumer spending, falling crude oil prices will likely boost other components of U.S. GDP Growth. The Labor Department recently announced that import prices declined 2.5% in December, the largest monthly drop since December 2008. The strong U.S. dollar is suppressing import prices. And as import prices continue to decline, it will help shrink the trade deficit and boost overall GDP growth. So thanks to a strong U.S. dollar and falling energy prices, it appears that the U.S. should continue to sustain at least 3% annual GDP growth moving forward.

Our confidence has responded. You’re putting more money in people’s pockets; they’re spending it. Also, emerging markets tend to rally as food and energy costs decline because the folks in emerging markets spend more on food and energy when they have more disposable income.

I really do think energy is going to firm up here with the high-end of the range uncertain. We have seasonal demand coming and that should deplete some of these excess inventories.

Sincerely,

signed- Louis Navellier

Louis Navellier

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