Market commentary: Oil and the European auto industry

After a small rebound at the beginning of February, investors that were hoping in a stabilization of oil prices have been sadly disappointed. Despite enjoying some technical support at around $50 a barrel for a few weeks, crude oil has returned to multi-year lows experienced in January of this year and it seems to be poised for further declines.

On Monday evening the FED’s oil extraction index for February came in at a seasonally adjusted 179.8, which is 0.4% higher than the previous month, and up 14.4% from the same month a year ago.

Despite the tumble in prices, US crude oil production does not seem to have declined nearly enough as OPEC’s countries hoped, and stockpiles around the world remain at records levels, adding onto a supply glut responsible for the plunging prices.

While the decision of Saudi Arabia to push for market share instead of margins has put pressure on smaller drillers and higher-cost shale producers, it does not appear to have resulted yet in a fast production cut. In fact, although US oil and gas rigs have been declining for 14 straight weeks, reducing the number of operating sites by 46% since October 2014, producers have increased production out of their more efficient and lower cost rigs, undermining a reduction in global production seek by OPEC producers.

As at today, the WTI Index has retreated to $43.76 per barrel, the lowest level since December 2004, with the Brent Index following suit and dropping to $53.77, just 5% above the lowest level reached on January 23rd.

With oil prices still falling, the cost of petrol and gasoline will remain low and this will hopefully soon translate in more consumer spending. In the meantime, one of the sectors that has already been fully benefitting by lower oil prices is the Auto industry.

This morning the February’s European Car-sales data was released, reviling an acceleration in global sales for almost all the major European car manufacturers. Car sales rose 7% last month to more than 958,100 vehicles, while two-month deliveries also rose by 6.6% to 1.99 million vehicles, up from a growth of 6.2% in January.

Lower fuel prices, combined with a much weaker Euro that allowed European car producers to offer convenient dealer discounts, encouraged consumer to purchase European brands such as Volkswagen, BMW and Renault. Sales did not only increase overseas, but also within the EU countries, with Spain recording a 26% growth, the largest among European countries, Italy posting a 13% jump and UK recording a 12% increase.

Volkswagen AG, the largest European car manufacturer, witnessed an 11% sales growth last month, supported by a 23% increase at its Spanish brand Seat and a 13% increase at its name-brand VW. Today, shares in Volkswagen were trading 1.65% higher in early trading. German BMW AG, the world largest luxury car producer, also reported sales that rose 16% in February.

Paris-based Renault SA posted a remarkable 9.8% sales growth, supported by high demand for its Captur crossover model. This morning shares in the French car manufacturer dropped 2.44% in early trading in Paris.

Although most of the stocks in the European auto sector have been on an uptrend since the beginning of the year, analysts believe that the sector still enjoys upside potential supported by the ECB liquidity injection, a weaker Euro and prolonged depressed fuel prices.

This article was issued by Paolo Zonno Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.