Oil investments in US likely to rebound in H2 2016

The US growth in first quarter was dragged down by private fixed investments, which declined 1.5 percent. In the first quarter, investments in both equipment and structures declined 9 percent on sequential basis. The financial disturbance seen at the start of 2016 is expected to have affected the lower risk sentiment; but the considerable decline in oil investments seems to be an important reason, said Danske Bank in a research report.

Investments in wells and shafts had dropped 86 percent quarter-on-quarter in the first quarter and are at the lowest level at present since the data series started in the first quarter of 1999. It is 70 percent lower than the top in the last quarter of 2014. Significant decline in oil prices are the main reason for considerable decline in oil investments. Drop in oil prices have made oil investments unprofitable.

Even if the oil sector accounts for a small share of the US economy, an indirect effect has been seen on the remainder of the economy as the oil sector has been a buyer of capex goods, noted Danske Bank. As oil prices are recovering, oil investment are expected to steady in the second half of 2016 and the remainder of the economy will face fewer headwinds from now on.

Also, the drop in oil investments is expected to be a one-off shock, to which the economy requires to adjust. Stabilization in China and the weaker US dollar also are also likely to underpin investments throughout the forecast horizon, added Danske Bank.

Meanwhile, residential investments are performing much better as housing market has continued to rebound. In the first quarter, residential investments grew 17 percent, the highest since the last quarter of 2012.

“As we expect the housing market to continue to recover supported by, among other things, low rates and increasing employment, we anticipate residential investments will continue to rise at a solid pace,” according to Danske Bank