The price of oil has collapsed since OPEC decided not to cut output. The decision was the result of rising production in the U.S. leaving OPEC as the “balancing mechanism” for world supply. Cutting their production would mean losing market share, and OPEC has finally drawn a line in the sand by saying they will not continue to be the only supplier to make concessions. The resulting collapse in oil prices is a positive for some people – U.S. consumers, Europe, India, etc. – who get an immediate “tax cut” since they are not paying as much for imported oil. However, oil producing companies and regions, like Russia, are hurt by falling prices as producers take significant hits to revenue and profitability.
It has been known for a while that the increased shale oil production occurring in the U.S. would likely change the global energy dynamic at some point, and we appear to be at that fulcrum. It may take some time for oil prices to find a new balance, and it is difficult to say where the range may settle. U.S. shale producers will come under some pressure giving the varying extraction costs, and we expect to see increased M&A activity as the energy industry consolidates.
Consumers are likely to feel immediate benefits as gas prices abate which leaves more in their pockets to save or spend. We can look at Retail Sales numbers as a reference point.
From the chart above, it is visible that there is certainly not a direct correlation between oil prices and retail sales. However, oil prices can influence retail sales, and there tends to be a lag of 12-18 months. The conclusion is intuitive – assuming no change in income, the higher oil prices are, the less money a consumer has to spend on other things. Still, it is important to keep this concept in mind as we look for likely investment opportunities in 2015.
Another factor that could support retail companies next year is improving wage growth. Unemployment claims continue to be well below 300,000 and the labor market continues to tighten. We’ve seen an improvement in wage growth, but we expect these rates to continue to increase given the strength in the U.S. economy. Improving wages also means increased opportunity for spending as disposable income is higher.