The Organization of the Petroleum Exporting Countries decided on Thursday not to cut production as many had hoped. This decision sent crude oil and energy stocks tumbling. The overall energy sector fell over six percent on Friday while U.S. crude fell to $66.36 per barrel, a level not seen in over four years. On the bright side however, lower oil prices will ultimately pass through to the consumer, which should be a positive for the overall economy. This may be the reason why the markets in general didn’t see too much pressure last week. For the week, the Dow Jones Industrial Average (chart), the S&P 500 (chart), and the small-cap Russell 2000 (chart) closed essentially unchanged, while the Nasdaq (chart) posted a strong weekly gain of 1.7%.
Friday’s trading session closed early due to the Thanksgiving holiday, so I will be very interested to see how crude oil and the energy sector trades this week as market participants get back to work and normal volumes resume. That said, I am expecting more downward pressure on oil and energy stocks in the near term. Without question the smaller, leveraged and debt-ridden oil and gas companies are in a precarious position, especially those in the exploration stages. These companies may be forced into consolidation or have no choice but to fire-sale part of their asset base in order to reduce debt levels. What I will be looking for in the coming weeks are large and mega-cap energy companies that have had their stock hit, and that have rock solid balance sheets that can weather the storm in this environment.
Despite the volatility the markets have experienced here in the fourth quarter and with crude oil falling sharply, three of the four major averages are still up impressively on the year, with the small-cap Russell 2000 (chart) basically flat. Now that we are in the month of December, I do not see any real headwinds as we close out 2014. In fact, with lower oil, the consumer may be a bit more cheerful as the Christmas holiday season fast approaches. If this is the case, stocks as a whole could end the year on their highs. Have a great week 🙂