Analyst: Why plunging oil is the best scenario for stocks

A number of experts consider that oil may reach $20 a barrel before bottoming. However, history demonstartes that it could be positive for stocks as corporate earnings and consumers reap the benefit of lower energy prices, according to Scott Minerd, global chief investment officer at Guggenheim Partners.

First of all, Minerd does not expect a significant near-term rebound for oil prices. On Monday, Nymex West Texas Intermediate futures CLK5 closed at $48.68 a barrel, down 19 cents.

The supply-demand tendency is still downbeat, particularly with storage capacity at the Cushing, Okla., delivery hub likely to run out in coming weeks, he said. That will put even more crude on the spot market. Moreover, rig counts have hardly fallen far enough to stop U.S. oil production from rising.

The next stop for oil could be around $34 a barrel from a technical standpoint, he said, and “could possibly break into something in the mid-$20s.”

Undoubtedly, the drop has been painful for the energy sector, while broader indices have at times rallied on the prospect of cheaper energy prices and at other times dropped in lock step with crude.

All in all, Minerd considers that oil weakness should be positive for U.S. equities, as he draws a parallel with 1986, when the advantageous effects of a drop in oil helped stocks rally even as the Federal Reserve raised interest rates.

In 1986, Nymex crude oil prices plunged more than 60% in the first quarter as investors came to terms with a global oil glut, ending the first three months of that year at $10.42 a barrel. Crude clawed back less than half of those losses first-quarter losses, ending 1986 with an annual loss of nearly 32%.

Stocks rose in 1986 but registered a third-quarter pullback of 7.8% before ending the year with a 14.6% annual gain and then adding another 20.5% in the first quarter of 1987.

(Stocks famously crashed in October 1987, leaving the S&P 500 to eke out a 2% annual gain for the year, MarketWatch notes.)

An eventual bottom in oil would have a wholesome impact on equities in terms of earnings and a “positive feedback loop” to consumers, who will benefit from lower energy prices.