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Posted by on Oct 22, 2014 in Laif Meidell

Are lower oil prices due to deflation?

Are lower oil prices due to deflation?

By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)

Crude oil prices, as measured by the S&P GSCI Crude Oil index, have been in a slump since mid-June as prices have fallen more than 22 percent through Tuesday’s close. OPEC appears willing to let oil prices fall in order to drive out the competition.

Lower oil prices mean lower sales revenue for energy companies. Energy company stocks have been hit the hardest during the recent market decline.

From late August through last Monday, the Dow Jones U.S. Energy index declined more than 18 percent, with some speculating that the decline in oil prices was a reflection of a weakening global economy and possible deflation.

This begs the question: “What’s better for the U.S. economy, weak oil prices or strong ones?” Strong oil prices mean more profits for oil companies that spend money to drill more wells and hire more people.

On the other hand, weak oil prices mean more savings at the pump by the consumer, thus giving him more available dollars to spend on other goods and services. The answer to the question is likely more dependent on the time period. Low oil prices have an immediate effect on consumers, putting more money in their pockets to spend today, whereas higher oil prices would create more profits for big oil and have a greater impact on the build-out and maintenance of the U.S.’s critical energy infrastructure.

On Tuesday, China’s National Bureau of statistics posted a 7.3 percent year-over-year quarterly growth rate. This was the lowest level of growth in five years, but slightly better than the 7.2 percent gain economists anticipated.

China’s industrial output rose by 8 percent in September, faster than the 6.9 percent increase in August.

With the price of crude oil attempting to stabilize last week and China’s economic growth better than expected, some investors have been bottom fish energy stocks, lifting prices higher.

Over the past week, the strongest sector has been energy with the Dow Jones U.S. Energy index gaining 7.33 percent over the past five trading days, gaining 3.02 percent on Tuesday alone.

This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.

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