Oil's ripple effect extends beyond energy sector
Oil fell to a five-and-a-half year low this morning as businesses with ties to the energy sector are starting to feel the shockwave. Caterpillar (CAT), who makes and supplies construction equipment to the oil and gas industries, received a downgrade of “underweight” from “neutral” from J.P. Morgan (JPM). J.P. Morgan cited Caterpillar’s close ties to the oil, gas and construction businesses as reasons for the downgrade. Shares of Caterpillar dropped sharply after the announcement.
Yahoo Finance's Jeff Macke says, “It’s not the news it’s the reaction. Caterpillar stock fell almost 6%, and that is what you need to pay attention to as an investor. You can’t have crude fall 50% without other problems rearing their ugly head.” Macke thinks the reaction to the Caterpillar downgrade hasn’t spooked the market: “That tells me that people are not really starting to panic yet on this sell off. You’re going to start seeing it ooze around.”
With so many businesses tied to oil the financial implications of cheap oil could be widespread. “We’ve got this sub industry of drilling and energy exploration in the states, really based on oil. Everyone is reworking their models right now. Saying, we don’t really need $75 a barrel we need more like $45. I don’t believe those models. I think that we are putting pressure on the financial system. There’s no sign of a real bottom yet and that’s scary for equities,” says Macke.
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The financial sector stands to be one of the biggest contenders to take a hit from low oil prices. “Anyone with loans out there. You have to watch for these tack-on effects. The idea that you can just hide in equities because it is going to be super good because you’re paying less at the pump is a little finger-painty,” says Macke.
As oil continues to fall, the question of how far it will drop and when we reach the bottom will fuel uncertainty and fear. “We’re going to see this happen in places that you don’t really suspect. The issue is you have is a combination of the large and unknowable. Those two words, you don’t want them going together if you’re an equity investor,” says Macke.
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