What has become unique in myriad predictions about the global economic investment direction are the ups and
downs of the worldwide oil market.
While traditionally an important commodity in years past, oil has been elevated to the status of stock market indicator. Ever since oil fell from grace in mid-2014, it’s rare to project daily stock market reports, whether NYSE, Nasdaq or foreign, without first analyzing the circuitous path of this critical fossil fuel.
As countless financial market analysts opened the year with predictions ranging from financial institution Goldman-Sachs’ ultimate $20 per barrel to Kiplinger Newsletter’s $45 by midyear, both optimists and pessimists have adjusted their prognostications accordingly to whose prognostications they believe.
In projecting the year 2016’s second half, global oil seems to have strongly revised the factors that had brought it down 70% from a mid-2014 high of $100 per barrel-plus on West Texas Intermediate and Brent crude:
Saudi Arabia, which exaggerated its exports reaching well over 10 million barrels per day to crush the United States’ phenomenal fracking expansion and widen its world market position, has recently announced oil price increases and future focus on non-oil revenues.
According to the U.S. Energy Information Agency, as well as the International Monetary Fund, global demand is surging both in the U.S., as well as abroad.
Major producers Venezuela, Nigeria, Iraq, Libya, Brazil offshore oil, Canadian oil sands, etc., are cutting daily production by several million barrels per day for a variety of reasons, as well as geological issues.
The worldwide glut, which was hanging over world oil markets like a sword of Damocles, is rapidly disappearing, foretelling a possible worldwide shortage later this year.
The U.S. driving season (which runs from Memorial Day to Labor Day) has been augmented by a switch away from the airlines and their snags and security backlogs. This likely has added to the already numerous cars hitting the highways again this summer.
As a combination of negativity broke the price per oil barrel down from $100 West Texas Intermediate two years ago, a rebound in demand, coupled with a drawdown in supply, could anticipate prices at least halfway back to the highs of 2014.
U.S. economic slowdown?
With the early summer downgrade of U.S. gross domestic product growth by the International Monetary Fund from 2.1% to 1.9% per annum, it seems coincidental that it closely followed the slowest monthly job creation (38,000 in May) since the end of the great financial recession in 2010.
For many previous months, the U.S. distinguished itself among traditional world-leading economies due to a strong domestic consumption sector, buoyed by a strong automotive and construction arena. This hit a brick wall in late spring as a combination of job shortages in the building subsector combined with downturns in general manufacturing and an export restraint due to withering world demand.
While the developed world as a whole had been suffering from a practical standstill since the beginning of the year, the first half of the 2016 U.S. economy supported a gross domestic product growth in excess of 2% prior to the late spring lull.
With most of the rest of the developing and developed world indicating a business “status quo” for the rest of the year, the current global standstill was bound to impact negatively, as exports have become America’s most expansive sector in the wake of the six post-recession years. Combined with increased domestic financial and production regulations, both world trade and its supporting domestic production and service jobs were bound to eventually react adversely.
Also added to America’s gross domestic product growth slowdown has been the downturn in the creation of independent businesses. This impacts the overall U.S. employment scenario since small businesses make up the majority of America’s potential working population of almost 160 million. Without an aggressive development of new world trade pacts leading to export expansion, the outlook for the reversal of the current sub 2% per year GDP growth for the rest of 2016 is highly unlikely.
Also highly questionable are the platforms of the two contending political parties, both of which seem to have built in “protectionism statutes.” These are more geared toward tariff increases and other trade-reducing aspects, which are sure to reduce an already flickering world trade, no matter which political party takes power next January.
Fortune 500 displays dramatic changes
While Fortune magazine’s list of the 500 leading corporations (Fortune 500) has gained notoriety and lasting fame by virtue of its adversaries and readership alike, it also has been noted for its ongoing changes during Fortune’s decades of existence as a mainstay of the most impressive profit makers.
It is of further note that its ups and downs are an ongoing reflection of the dramatic changes that have been constantly occurring in the vagaries of the United States’ major economic sectors. The year 2016 is no exception in this category of accomplishment.
While the overdone tech meltdown at the turn of the last century was rather drastic and the financial crisis took its toll in 2007-2009, the price crash of commodities, especially oil, has made its mark in late 2014, throughout 2015 and into 2016.
As could well be imagined, energy was the big loser for 2015, with 2014 total earnings of $116 billion, reverting to $44 billion in losses. This reflected a total 33% energy revenue drop year over year.
Conversely, the 2015 profits champ was the finance industry (banks, insurers, Wall Street magnates), which had regained the top spot in 2012. This came after a sharp negative reset in 2008 (the depth of the great financial crisis), maintaining a quarter of Fortune 500 profits in 2013 and 2014 as well. The Fortune 500’s rising star last year, at $24.4 billion in profits, was JPMorgan Chase, followed by energy giant Exxon/Mobil as the list’s second-biggest earner in 2014.
The brass ring last year went to Apple, with $534 billion in profits, greatly engendered by $14 billion in sales of its iPhone 6. While Warren Buffett’s Berkshire Hathaway group of corporate winners came in third at $24.1 billion, Wells Fargo’s fast-growing banking structure was closely behind with biotech Gilead Sciences (49.6%) rounding out the top five.
The latter was particularly impressive in the health-care arena, along with Amgen (34.5%) and Biogen (20.9%), indicating the impressive health-care jumps in 2015. These are expected to do even better as that sector continues to surge during the rest of 2016 in an accelerating manner.
This article was originally titled “Oil: The ultimate indicator?” in the September 2016 print edition of Supply House Times.