What began as a seemingly insignificant downturn in the summer of 2014 turned into the cratering of the energy markets by the summer of 2015. Crude oil prices began to give way last June, with Brent crude oil dipping under $100 per barrel in September 2014. This was the first time Brent had fallen below this level since a one-week drop in April 2013. Even so, the April 2013 decline only went to $96.84 and quickly recovered; the more recent drop continued its downward spiral.
Not much concern was felt in those initial months. Yes, energy companies would feel the pinch, but lower fuel costs would be great for the rest of us. Lower prices at the pump mean more money in consumers’ pockets, which should help out companies in the consumer discretionary space (such as retailers, restaurants, hotels, autos and even certain industrials such as airlines and transports). However, falling fuel prices didn’t benefit the retail space as much as initially thought—with many consumers changing the way they spend their discretionary income and allocating a larger portion to technology, healthcare and paying off bills, not to traditional outlets such as apparel and accessories.
Along with affordable gas, a strengthening U.S. economy and tightening labor market instilled the confidence to pick up spending on large ticket items for the first time in years. Auto sales hit a fever pitch this past summer, with total vehicle sales in June, July and August reporting 17.5 million or more, well above expectations.
Strength in the motor vehicle market is due to the return in popularity of trucks and SUVs, as lower fuel prices have caused consumers to feel more comfortable purchasing gas guzzlers. Other large ticket items such as appliances and homes were also helped in the last year, leading to strong fundamentals for home improvement retailers such as Home Depot (HD) and Lowe’s (LOW), and appliance makers like Whirlpool (WHR) and homebuilders Lennar (LEN) and D.R. Horton (DHI).
On the industrials front, the benefits of falling oil prices have been mixed. Airlines were helped by lower jet fuel prices; and everyone assumed the savings would be passed onto customers, but with high demand, these airliners didn’t have to lower fares. Some airlines increased fares for popular domestic routes as they tried to offset the impact of the stronger dollar on their international routes. As for transports such as FedEx (FDX) and UPS (UPS), lower fuel actually meant lower fuel surcharges, and that hurt the bottom-line more than it helped.
Just as we rounded out the second quarter earnings season, during which the S&P 500 energy profits plunged 53.7% year-over-year and revenues declined 31%, analysts were looking for a bit of a reprieve in Q3 as year-over-year comparisons would finally be apples-to-apples. The initial decline in the oil markets began in Q3 of 2014; therefore, Q3 2015 would be the first quarter with an even comparison. In August, however, oil prices plunged further, taking out January lows and briefly dipping below $40 (see “Energy sector rout”). In lockstep, revisions to Q3 earnings estimates for big energy companies also fell. Behemoths such as Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil names, saw their Estimize EPS consensus fall 13% and 39%, respectively, in the month of August.
Economic indicators for oil also paint a bleak picture. U.S. crude oil inventories and natural gas storage figures have ebbed and flowed week by week, mostly rising. On average, since the beginning of the year, week to week inventories and storage for crude oil and natural gas have risen by 455% and 9.3%, respectively. Rising inventories paired with sluggish economic activity and slowing demand are responsible for lower prices.
As China continues its sell-off, prompting a similar correction in the United States and pushing energy prices even lower, it doesn’t look as though there is much hope for energy companies in Q3, with the Estimize consensus looking for negative EPS of 60.4% and negative revenues of 31.2%. For now, analysts are expecting those numbers to improve to -50.1% and -21.7%, respectively for Q4.