Stock Report For Week Ended December 12, 2014
Stocks fall sharply alongside oil prices
Stocks fell sharply as concerns about the effect of declining oil prices on energy sector profits appeared to outweigh optimism over the beneficial impact of falling gas prices on consumer spending. The Standard & Poor's 500 Index recorded its weekly loss since early October ant its steepest weekly decline over two years. While energy stocks are only modestly weighted in the S&P 500 Index-representing a bit more than 8% of the index as of the start of the month-they exerted a larger drag on it and the Dow Jones Industrial Average than they did on the technology-heavy Nasdaq Composite. The smaller-cap indexes also seemed to benefit more from the flip side of the decline, as smaller companies tend to rely more on the domestic economy and healthy consumer spending.
Supply and demand picture dims for oil stocks
Oil prices fell steadily through the week, dragging energy shares with them. The first big drop occurred Wednesday, after news about both supply and demand shook the market. The U.S. Energy Department reported a surprise increase in the nation's crude supplies in the previous week, suggesting that producers were not ramping down production quickly enough to stem a further decline in oil prices. At the same time, the Organization of Petroleum Exporting Countries (OPEC) lowered its estimate of global demand in the coming year and anticipated that demand would fall short of the group's production target by over one million barrels a day. The International Energy Agency lowered its own demand forecast on Friday, spurring a further sharp drop in oil and stock prices.
Other factors are also at work in oil price decline
T. Rowe Price energy analysts and managers observe that a sharp increase in North American shale oil production-excess production capacity that was planned in the last decade is coming into play at precisely the wrong time-and OPEC's refusal to cut its own output are two key reasons for the decline in oil prices. But they also note that other factors are at work. Russia and Venezuela have been forced to sell every drop they extract to support fragile economies, while Iraq and Libya, which largely halted production in the midst of political conflict, have largely come back online. Meanwhile, the sluggish global economy has resulted in relatively tepid demand growth-as opposed to the world's substantial ongoing demand for oil. They expect the long-term trend for oil prices to remain subdued, but they believe markets could see some short-term and temporary price volatility due to cyclical factors, such as an unexpected demand spike or a geopolitical crisis.
Further data on upside of oil price decline fail to sway sentiment
Investors had appeared to focus on the upside of falling oil prices over the previous weeks, but more data on such benefits to the broader economy failed to stem the turn in sentiment. Stocks did enjoy a brief bounce on Thursday, following news of a sharp rise in retail sales in November. The National Federation of Retailers also reported a healthy increase in sales over the "Black Friday" weekend as Americans took gas savings to the mall. On Friday, however, news of a jump in consumer sentiment failed to stem another steep decline in stocks. The Thomson Reuters/University of Michigan gauge of consumer sentiment reached its highest level in eight years, as consumer attitudes were boosted by hopes for higher wages as well as lower gas prices.