Veteran technical analyst and data cruncher Tom McClelland notes that many analysts are likening the recent price drop in oil to a big tax cut, with an associated stimulative economic effect. But what are the real dollars involved? Here is Tom’s math:
The U.S. consumed 126 billion gallons of gasoline during the 12 months ending Sept. 2014. So given the drop in RBOB gasoline futures from the top at $3.10 in June to $1.64 yesterday, that $1.46 difference would amount to $183 billion over 12 months.That’s just gasoline, and it assumes that today’s price sticks for the long run.
But if we consider that gasoline is just one of the uses for crude oil, then the savings magnify. According to EIA data, consumption of crude oil during the latest 12 months was 6.9 billion barrels. So the price drop from $107/barrel at the June 2014 high to $59 today represents a total presumptive savings of $332 billion per year.
That is well short of the $85 billion per month of bonds that the Fed was doing during the peak of the latest round of quantitative easing, but it is not nothing.
McClelland’s conclusion: While the Fed has ended QE, the global crude oil market, led by the Saudi Arabians, has presented us with its own form of stimulative easing. Of course, history shows that the oil market can yank back its own QE quite fast. But don’t expect a major rise in crude oil prices until at least March of next year, and beware of many unexpected consequences such as a rout of supposedly safe master limited partnerships that can’t pay their dividends.
Now here are a handful of facts about energy and the rest of the economy:
— Gasoline futures fell to $1.58 Monday morning, which suggests retail prices at the pump will head as low as $2.25 by the end of January. Road trip!
— Deals are supporting the S&P 500 as they are taking stocks out of circulation (depressing supply) and giving investors an idea of what stuff is worth. Since February there have been 609 major public and private deals worth over a trillion dollars in total, with another $89.9 billion in December alone so far. Merck (MRK) for Cubist Pharma (CBST) was a biggie this week.
— The dollar index looks set to rip higher. Conventional wisdom says that’s bad for big-cap companies’ earnings, but that’s not necessarily so. In 1995 and 1998-2000 it provided a boost, in part by supporting lower inflation and higher price/earnings multiples.
— One brokerage analyst last week reported a finding that even though real GDP in the United States has risen 30 percent since 2000, U.S. oil consumption has been unchanged. At the same time, oil production has soared. This helps explain why oil prices have crashed.
— Federal revenues are up 9 percent year over year, reflecting the growing economy. The deficit is narrowing dramatically.
Add them up and you have a lot to be positive about in coming weeks.