Movin' On Up

by Ralph Cole, CFA Executive Vice President of Research

Movin’ On Up

U.S. oil production is finally starting to fall. After unrelenting production increases for the past several years, weekly oil production numbers have begun to decrease. In response to falling oil prices rig counts have dropped dramatically here in the U.S. The number of rigs operating in the U.S. is down 53 percent from the peak reached last year. This change has helped to drive West Texas Intermediate (WTI) oil prices back up to the mid-$50 range from a low of $43 just one month ago.

We would be remiss if we didn’t point out that the global demand for oil continues to rise. This is the other half of the supply-demand relationship that ultimately determines oil prices. The International Energy Agency (IEA) increased their expectations for global oil demand an additional 90,000 barrels per day, bringing their 2015 projected increase of daily oil demand to 1.1 million barrels per day.

No Expectations

Earnings season is a fickle, nuanced and fascinating time of year for portfolio managers. After each quarter of business, companies report their earnings and sales to analysts and the public. Companies guide investors to what they think earnings will be in future quarters. When a management team realizes that they are going to materially beat or miss their earnings guidance they announce it before the scheduled earnings release date which is called a pre-announcement. The pre-announcement ratio is calculated by taking the number of negative pre-announcements and dividing it by the number of positive pre-announcements by company. Strategas Research Partners calculates that the ratio is 6.2 to 1 this quarter, versus a long-term average of 2.73.  This is actually a very positive contrary indicator for the market. Companies have lowered expectations so much, that they usually end up beating the lowered bar. While this is only a short-term indicator, it may help explain positive stock movements on relatively weak earnings.

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 Takeaways for the week:

  • Oil companies have drastically cut the number of oil rigs operating in the U.S., which will help improve the supply demand balance for crude oil in the coming months
  • The stronger dollar and lower energy prices have led companies to pre-announce lower earnings for the first quarter of 2015