What is Happening to Oil?

Rooted in better-than-expected earnings, rising consumer confidence, Federal Reserve stimulus, and the recovering housing market, Standard & Poor’s 500 Index advanced 16 percent this year, extending the bull market rally since March 2009 to 116 percent. But profit growth, which spurred the three-year bull market, is poised to end.

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Earnings from oil and gas producers, which account for 11 percent of the $13.2 trillion S&P 500 market value, will fall 24 percent in the three months ending in September, the largest decline in three years according to Bloomberg. While crude oil prices have surged 20 percent since reaching a nine-month low in June, reaching $92.89 per barrel, September’s earnings reflect June’s lower price.

Excluding the energy suppliers, data shows earnings in the benchmark gauge for U.S. stocks would climb 2.5 percent this quarter, the twelfth straight increase.

Lower earnings from energy suppliers, like Apache (NYSE:APA) and Occidental Petroleum (NYSE:OXY), indicate that declining oil prices rather than lasting weakness in U.S. profits caused the slump.

Apache, the United States’ third-largest oil and natural gas producer by market value, reported a 36 percent drop in second-quarter income. Earnings at Occidental Petroleum decreased 26 percent last quarter and are expected to fall another 25 percent for the three months ending this week. And in Monday morning trading, shares in Alpha Natural Resources (NYSE:ANR) dropped 3.9 percent.

When oil prices slumped in May, fears of another recession spread; lower energy earnings have coincided with economic slumps in the past. As the U.S. GDP contracted in late 2008 and 2009, the industry reported five straight quarters of decreasing profits.

But many analysts believe that current energy prices are in the perfect position: companies are allowed to make money but prices do not crimp global demand. Cheaper oil prices mean lower costs and higher earnings for industries that rely on the commodity. For example, U.S. Airways (NYSE:LCC) exceeded analysts’ projections last quarter because fuel, its largest cost, fell by 4.4 percent.

Nevertheless, the 24 percent earnings decrease projected for September would be the biggest decrease since energy profits fell 24 percent in the fourth quarter of 2009.

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