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Crude oil prices are hovering around $80 a barrel, the lowest level since summer 2012.

Crude oil prices are hovering around $80 a barrel, the lowest level since summer 2012.

Cheap oil affects a lot of things in the global economy, including a bump in U.S. consumer spending, as low prices at the pump translate into more discretionary cash elsewhere. But perhaps the most obvious sign is the big anchor on energy stocks.

On Friday, for instance, Chevron CVX, -2.64% and Exxon XOM, -1.50% each reported soft results. Exxon suffered a slump in revenue and production. The oil leader topped earnings estimates, but mostly because of diversification into other segments like petrochemicals. As for Chevron, it also beat expectations on profits but its revenue slipped.

It’s not only megacaps. A few days before, U.S. oil company Suncor Energy SU, -4.36% said third-quarter profits dropped 46% on weak crude oil prices, and Europe’s largest oil-field service company, Technip, posted a 12% decline in net income.

Of course, the million-dollar question isn’t whether oil stocks will feel the pain — they already have, with the vast majority of energy players underperforming since January and particularly since crude oil’s peak in June.

What investors should ask themselves is whether the outlook is going to change, and whether now may be a good time to snap up oil stocks on the cheap.

Let’s explore that idea.

Outlook for crude oil is ugly: The bottom line is that we have three major factors working against oil prices: abundant supply driven by shale-oil drilling, soft demand as the global economy remains challenged, and a strong U.S. dollar that suppresses commodity prices.

Regarding demand, the International Energy Agency just cut its 2015 consumption target despite forecasts of low prices that actually encourage oil use. Total growth on the year should be only an additional 300,000 barrels a day, a 3% bump, according to IEA projections. The U.S. Energy Information Administration is also forecasting weak demand, thanks in part to a milder winter.

Meanwhile, experts expect global supplies to stay elevated because of a rise in drilling. In fact, OPEC recently signaled that even in the face of weaker oil prices, it will not cut back on production next year.

Throw in a strong U.S. dollar, created by the end of “quantitative easing” and an improving U.S. economy that increasingly is looking like the best developed market in the world, and you have even more headwinds for crude. Since oil is a commodity that’s priced in dollars, the cost per barrel naturally drops as the greenback gets stronger vs. other currencies, and gains more purchasing power as a result.

Goldman Sachs GS, +0.44% recently slashed its outlook for oil prices, predicting West Texas crude will hit $75 in the first quarter and remain there most of next year, and won’t break much higher than the current price of $80 in 2016.

Market watch
Published on:
November 4, 2014
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