Of the many things market watchers were tracking closely this year, a collapse in oil prices wasn’t among them.
“Oil prices will go down in the history books as the big surprise for 2014,” Darrell Cronk, deputy chief investment officer at Wells Fargo Private Bank, told a gathering of clients at the Denver Art Museum on Tuesday afternoon.
The decline offers a mixed blessing. It will benefit consumers by freeing up money that otherwise might have gone to fill gas tanks or heat homes.
But it will make it tougher for oil and gas producers to earn a profit, and their shares have been hammered accordingly — not good news in petroleum states such as Texas, North Dakota and Colorado.
Oil and gas severance taxes totaled $318.9 million in the past 12 months through October in Colorado, more than four times the amount collected in late 2009, when prices were last depressed, according to a report Tuesday from Brian Lewandowski, an economist at the University of Colorado.
Cronk said the industry is debating the direction of oil prices, with some predicting a drop to $60 a barrel is more likely than a rebound to $90.
Although some people cite higher domestic production to explain the price drop, the big shift is that Saudi Arabia has stopped acting as a price stabilizer keeping crude in the range of $100 to $120 a barrel, Cronk said.
Why now? Iran and Russia are two of the countries most vulnerable to lower oil prices, and Saudi Arabia may be punishing rivals it views as acting against its interests in the region, Cronk said.
Saudi Arabia’s oil minister has denied that his country is trying to “politicize” the oil markets.
U.S. stock indexes, however, have managed to hit new highs despite the big drop in oil prices and new recessions in Europe and Japan.
The U.S. bull market that started in 2009 is the third-longest in history and should continue, albeit with more volatility, predicted Michael Serio, regional chief investment officer with Wells Fargo.
U.S. stock prices have managed to climb higher and higher on smaller and smaller trading volumes, and that will contribute to greater volatility, as October showed.
Cronk said he expects interest rates, which have fallen since the early 1980s, eventually to start rising, handing some big losses to fixed-income investors who aren’t prepared.
“People are underappreciating the amount of risk,” he said.
One opportunity Cronk urged investors to consider are battered European equities.
The divergence in valuations between U.S. and European stocks is the largest in four decades, and Cronk urged his listeners to run “toward the fire.”
