Some pain predicted as oil prices slide to 6-year low

The drop in oil prices continued Monday as crude reached its lowest level in about six years.

The weakened oil market weighed on energy stocks as earnings estimates are being cut -- leading some analysts to question whether the anticipated economic benefits of lower gasoline prices will offset spending cuts by energy companies.

"[Current] energy prices will be better for the economy," said Tariq Zahir, managing member of Tyche Capital Advisors LLC. "But in the short-term it could be a little bit of a sting."

The price of oil has fallen 50 percent since last summer as a result of an oversupplied market -- about 2 million barrels a day more than demand -- and slowing economies in Europe and Asia. Oil-producing nations are pumping more than 70 million barrels a day, according to the Energy Information Administration.

The market was thrown into further turmoil when the Organization of the Petroleum Exporting Countries decided to forgo a production cut in November, a move some analysts say started a price war aimed at slowing record production from North American shale formations.

Saudi Arabian Prince Alwaleed bin Talal told USA Today: "The decision to not reduce production was prudent, smart and shrewd. Because had Saudi Arabia cut its production by 1 or 2 million barrels, that 1 or 2 million would have been produced by others."

He said the market "will not see $100-a-barrel oil again."

For the oil market to stabilize, crude prices need to "go low enough for long enough" to curb U.S. shale exploration and production, according to a forecast released Monday by Goldman Sachs analysts.

After the release of the report, West Texas Intermediate crude dropped 4.7 percent to $46.07 a barrel on the New York Mercantile Exchange -- the lowest price since 2009. Brent, which trades on the ICE Futures Europe exchange in London, fell 5.3 percent to settle at $47.43 -- also the lowest close since 2009.

Goldman Sachs analysts reduced their three-month price forecasts from $80 a barrel for Brent crude to $42, and $70 a barrel for West Texas Intermediate crude to $41.

"To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," the Goldman Sachs report said.

Shares of energy companies fell Monday on expectations that quarterly earnings will be less than estimated.

Analysts expect the energy sector will see a 41 percent decline in fourth-quarter earnings. Just last week the market was expecting a 17 percent decline in earnings, said Rob Lutts, president and chief investment officer of Cabot Wealth Management Inc.

"Earnings of energy companies are going down rapidly," he said. "They are still going to have earnings, just not as high."

Shares of Exxon Mobil Corp. fell 1.9 percent, Chevron Corp. dropped 2.15 percent, and Schlumberger Ltd. fell 3.9 percent on the New York Stock Exchange.

Shares of El Dorado-based Murphy Oil Corp. slid 3.7 percent to close Monday at $46.74. Murphy's shares have dropped 13.6 percent since Nov. 21.

Murphy Oil, which will release its fourth-quarter financial results Jan. 28, has also seen its earnings estimates cut by analysts as have other energy companies.

"With the price of oil coming down the way it has over the past few months earnings estimates definitely need to come down," said Carlos Newall, an equity research associate with Raymond James and Associates. "That's what you are seeing across the board."

He said Murphy Oil has been downgraded to an "under-perform" rating by the firm as the result of choppy performance in Malaysia and exposure to oil and natural gas prices. About 72 percent of the company's proved reserves are oil.

Newall projects Murphy Oil to post earnings per share of 36 cents for its fourth quarter. During the same period a year ago, the company had adjusted earnings of 96 cents per share.

Some analysts are beginning to doubt the economic advantage of falling energy prices.

Falling gasoline prices have been good for consumers. The national average price for regular grade gasoline on Monday was $2.13 a gallon, down from $3.31 a year ago.

In Arkansas, the price at the pump averages $1.99 a gallon, compared with $3.09 in 2014. In the Fort Smith metro area, motorists are paying an average of $1.78 a gallon, according to auto club AAA.

Gasbuddy.com said American households will save about $118 billion on gasoline expenses this year, said Tom Kloza, chief oil analyst for the price-tracking website, adding that the average price nationally will fall below $2 per gallon, later this week. January is one of the slowest months for gasoline demand.

Savings at the pump give consumers more money to spend on other things, analysts said.

"All companies in the U.S. ... will have the benefit of a lower expense level," from gasoline prices, said Keith Bliss, senior vice president of Cuttone & Co. Inc, adding that businesses such as retail and transportation companies will be able to offer more services and keep prices lower.

"It gives companies in the U.S. a little more wiggle room to expand their businesses and hire more people," he said.

On the flip side, falling oil prices are leading to less investment in the energy industry. This means the industry known for well-paid workers will start to see job cuts, analysts said.

Some domestic oil wells have already been shut down -- "and that will translate into layoffs," Bliss said.

Energy companies, including ConocoPhillips and Marathon Oil Corp., have said they have cut their operating budgets by about 20 percent for 2015. Other companies in the industry are already planning for layoffs.

Murphy Oil will announce its spending plans later this month. Analysts expect the company will reduce its spending.

The drop in gasoline prices is a good thing -- if they are falling for the right reason, said Phil Flynn, an energy analyst with Price Futures Group.

"The concern I have is that ... gasoline prices are falling too quickly," he said. "But when they are driven down because OPEC is dumping oil on the market and demand is weak that does damage to the economy."

Flynn said the tightening of spending in the energy industry not only leads to job cuts, but it slows manufacturing activity and will constrict bank lending not only in the energy sector where it has been active, but in other industries.

"The longer [prices] will stay lower, the more pain will be felt," said Zahir with Tyche Capital Advisors. "It is going to be a hit to the overall general economy."

A Section on 01/13/2015

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