Low Demand Forces Cost Cuts – 12/7/15

As we enter an unusually warm December, companies which usually counted on increased fuel use in the winter months face falling stock prices due to low demand. The companies, already facing high debt volumes taken on for projects not profitable under the current low prices, are in need of weather related demand as industrial demand for petroleum products falters. If the warmer than normal weather persists, then the energy sector will continue to drag on overall economic growth.

Companies may be able to salvage their own bottom lines through cost cuts provided that they are willing to reduce investments and, consequently, long term growth prospects. Some companies may benefit from the carnage brought about by plummeting prices provided they can acquire troubled competitors at sufficient discounts. Still, there is the possibility of prices staying depressed as slow downs in major consumer economies like China’s result in low demand growth while oversupplied inventories bulge due to high and robust output.

Even cheap buys could be too costly as margins continue to shrink. OPEC refusing to reduce output, the robustness of high-cost US producers and fracking operations, and the impending re-entry of Iranian suppliers previously sanctioned are all factors investors are weighing as they send benchmarks further and further below $40 a barrel. And as those prices fall further ETF’s investing in green energy will find themselves under greater pressure as renewable sources appear less economically viable and China reins in demand. Managers of such funds are likely to keep a close eye on the Paris climate talks and its after effects.

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