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Gary Lenhoff, CFA®
Chief Investment Officer - Fundamental Equities
Great Lakes Advisors

The price of oil has fallen more than 40% since June 30, declining from $105/barrel to the current price of about $61. Several factors have caused this decline–the shale boom in the U.S. has resulted in a 65% increase in oil production since 2009, reducing our dependence on imported crude; and economic weakness around the globe, particularly in China and emerging markets, coupled with greater energy efficiency in developed economies, has muted demand for oil. The severity of the price decline was worsened by investors selling financial instruments linked to the price of oil that had been accumulated to hedge risks associated with owning more traditional investments.

Accordingly, energy-related stocks have been hammered in the process and the S&P 500 Energy sector is now down 18% since October 1. However, as the chart shows, not all producers are equally exposed to effects of falling oil prices. Accordingly, shale producers–whose infrastructure build-outs, decline rates, and high levels of rig activity put them at tail end of the non-OPEC marginal cost curve–have been hit especially hard. As a whole, stocks of shale producers are down 32% since the start of the fourth quarter.1 Fortunately, energy stocks have historically averaged just over 10% of the S&P 500 Index, so the drop has not severely impacted well diversified equity investors. At this point, investors in the index have lost just under two percentage points since the start of the fourth quarter.  

On the other hand, the decline in oil prices is good for consumers and also a net positive for the U.S. economy as a whole. To wit, it will cost 5 to 7% less to heat our homes this winter, and U.S. gasoline prices have dropped to $2.64/gallon on average (though they remain quite a bit higher here in Illinois). Current estimates are that GDP growth in 2015 could be 0.6-0.8% higher next year as a result of lower fuel costs. We have not explicitly changed any of our forecasts to reflect better growth in the U.S. in 2015, but lower fuel prices make us feel a bit more confident that the economy is on a reasonably firm footing.  



1. Market Vector Unconvent Oil & Gas ETF (FRAK)
2. Source: International Energy Agency