2 simple charts illustrate why low oil prices are so depressing

The energy sector is massive, and the outlook continues to be pretty weak.

Oil prices have somewhat stabilised since they crashed ~60% within the last 15 months. But the oil industry is far from healed after the unexpected happened.

The energy sector’s capital expenditure, or capex, on spending for fixed infrastructure that secures future business activity, has slumped 8% this year according to Goldman Sachs.

Energy capex growth is set to fall another 20% next year, wrote the firm’s strategists led by David Kostin to clients on Friday.

There’s usually a lag between energy-sector capital spending and oil prices, with prices leading. That means even if oil prices defy most forecasts and rise sharply from current levels, capex will likely still fall.

Energy giants are already expecting lower oil prices for some time. This earnings season, oil giants including Chevron and Exxon lowered their guidance for capex spending next year to account for lower oil prices. BP talked about positioning for a period of weaker prices.

“Our commodity strategists expect Brent crude oil prices to remain below $US50 during 2016 given an oversupplied market,” writes Kostin.

The second chart, which is literally depressing for the rest of the market, is that because the energy sector makes up 30% of capex spending on the S&P 500, it will weigh down the entire index’s spending.

S&P 500 capex spending excluding the energy sector “should grow modestly”, forecasts Goldman.

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