Oil Prices create a Boost

Thursday, January 29, 2015

The past year has seen the world oil price fall by more than 50% and the oil price is continuing to slide. The main factor behind this collapse is the global supply of oil has surged relative to demand

Last decade saw the price of oil go from $US10/barrel in 1998 to $US145 in 2008. This sharp rise in the oil price encouraged greater fuel efficiencies (use of ethanol, electric cars, etc) and significantly, encouraged the development of new sources of oil. A perfect example of this has been the surge in US shale oil production this decade.

A couple of other factors have also played a role in the oil price collapse.

Firstly, the emerging world (China, India etc) was a key source of growth in oil demand last decade but emerging country growth has slowed over the last few years in response to various economic problems. Secondly, the rise in value of the $US in response to relatively stronger economic conditions in the US.

How far the oil price will fall is a guessing game as it was with how much it would rise last decade. However, history tells us that it can fall much further than you think until supply is finally cut back.

Impact of low oil prices

Lower oil prices are a huge positive for the global economy generally as business costs fall and the lower price of fuel provides a boost to household spending power. Rough estimates suggest a boost to growth in industrialised countries and in Australia from the 50% fall in the price of oil of around 0.7% if the fall is sustained.

For Australian households, the plunge in the global oil price adjusted for moves in the Australian dollar indicates average petrol prices have further to fall towards $1/litre.  In fact some service stations have already dropped the petrol price to 99.9 cents a litre.

Share markets have initially reacted negatively to the fall in oil prices because the negative impact on energy producers is what is most visible and this is being magnified by the steepness of the fall. However, the risk of a major threat to the global economy or share markets from energy producers is low. 

It’s likely that over time the positive impact on global growth and hence profits from lower oil prices will dominate and this will help drive share markets higher by year end. After oil prices plunges into 1986, 1998 and 2008 US shares gained an average 23% over the subsequent 12 months.

 

This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such.  Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor

 

 

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