Winners and losers from the oil price slump
In summary:
- 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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Frequently Asked Questions about this Article…
The slump in global oil prices in 2014 was primarily caused by a surge in US shale oil production, which significantly increased the supply of oil. Additionally, weak demand due to economic slowdowns in the eurozone and China contributed to the price decline.
Declining oil prices benefit oil-importing countries by reducing their import costs, which can lead to higher consumption and overall economic growth. This is because consumers and businesses have more disposable income to spend on other goods and services.
Sectors that benefit from the oil price slump include autos, airlines, chemicals, and agriculture. These industries benefit from lower energy costs, which can improve their profitability and competitiveness.
Sectors negatively impacted by declining oil prices include oil exploration and production (E&Ps), energy capital goods, clean energy, and energy high yield. These sectors face reduced revenues and investment due to lower oil prices.
The US economy benefits from the oil price slump through higher consumer spending and a lower energy import bill, which boosts overall economic growth. However, this is partly offset by reduced investment in the energy sector.
Active investing is important during periods of fluctuating oil prices because it allows investors to effectively select stocks that are likely to benefit from the changing economic landscape. This approach can help investors capitalize on sector winners and avoid sector losers.
US shale oil production has played a significant role in increasing global oil supply. In the three years leading up to 2015, US crude oil production increased by 2.8 million barrels per day, contributing to the overall growth in non-OPEC oil supply.
Expectations of future supply and demand can influence oil prices by affecting market sentiment. If investors anticipate changes in supply or demand, such as increased production or reduced consumption, it can lead to price adjustments in anticipation of these changes.
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