Arguably the most important economic development of 2014 was the slump in global oil prices in the second half of th e year. As prices continue to plummet in early 2015, this perspective looks at the causes of the decline and the likely impact on selected co untries, sectors and individual companies. While the decline in oil prices should benefit the global economy as a whole, it will also create specific winners and losers, underscoring the importance of an active investment approach.
- Oil-importing countries benefit from reduced import costs and higher consumption. Major oil producers lose out but the overall global economic impact should be distinctly positive.
- In the US, higher consumption and a lower energy import bill are only partly offset by reduced energy sector investment, with a significant boost to overall economic growth.
- Sector winners include autos, airlines, chemicals and agriculture. Sector losers include oil E&Ps, energy capital goods, clean energy and energy high yield. This means that effective stock selection is critical, underscoring the value of active investing.
DECLINING OIL PRICES – WHAT’S BEHIND THE SLUMP?
The price of a barrel of Brent crude and West Texas Intermediate (WTI) crude has slumped by 58% and 55%, respectively, since the start of the second half of 2014. As with all commodities, prices are determined by the interaction of supply and demand and to a smaller extent by expectations of future supply and demand. Weakness in the eurozone economy and the structural slowdown in Chinese economic growth have weighed on demand. However, by far the single most important factor behind slumping oil prices has been the surge in US shale oil production.
US oil production has acco unted for the vast majority of non- OPEC supply growth. The US Energy Information Admin istration (EIA) estimates that, in the three years to 2015, US crude oil production will have increased by 2.8m barrels a day (b/d) to 9.3m b/d, a figure comparable to Iraq’s 2013 total production of 3.2 m b/d.
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