US stocks barely registered any gains for 2015. Headwinds, ranging from increasing interest rates, a stronger US dollar and the big drop in oil prices, had detrimental effects on US stocks. Specifically, a record 35% of the trading days this year saw the price of oil and the S&P500 index decline in tandem, as the near-term impact of lower oil prices has outweighed perceived benefits of cheaper gasoline and other commodity costs.
What savings have US consumers reaped from lower oil prices? In June 2014, oil prices reached $107 per barrel and the average price of a gallon of unleaded gas was $3.68. As of December 2015, the price of oil was under $38 per barrel and the average price of a gallon of unleaded gas was $1.99, or 45% below where it was in June 2014. Assuming the typical driver logs 12,000 miles per year and averages 20 miles per gallon, we calculate the annual savings per vehicle at just over $1,000. JP Morgan estimates consumers are spending 80% of the savings, a nice bump but still not enough to accelerate GDP growth past the 2% rut of the past decade.
Oil being the ultimate commodity, meaning supply and demand are the drivers in establishing price, what can we expect for 2016? We all remember that oil hit $147 per barrel in mid-2008. Besides helping to push the economy into a recession, the high price of oil attracted a surge of new investment looking to capitalize on these “permanently” high prices. By 2011 the advent of “fracking” began to produce significant new discoveries and today US production is nearly double 2008 levels.
The chart in the lower right corner of the dashboard highlights the increase in the number of oil and gas drilling rigs during 2008 and the subsequent decline in 2015 once oil prices began to drop. The drop in drilling rigs will eventually lead to a decline in production. Once production is in line with demand, oil prices should stabilize. If demand begins to pick up (e.g. more SUVs and trucks on the road), oil prices will likely begin to move up as well. This boom-and-bust cycle has been repeated countless times in the past 150 years.
The headwinds mentioned above that helped produce a flat year for stocks are continuing as we enter 2016. The Fed will be a major focus and any deviation from the hoped-for slow pace of interest rate hikes will increase market volatility. In the meantime, enjoy gas prices at $2 per gallon and Happy New Year!