- In customer reports and interviews with business insiders, energy analysts and other industry experts warn of the effects of ultra-low oil, which is currently trading around $ 20 a barrel, across the economy.
- While the positive effects of lower oil prices on consumers outweigh the negative effects on companies, the effects on companies and their employees tend to be more sudden, an analyst told us.
- With little evidence that oil prices could rise significantly in the short term, the BlackRock Investment Institute said in a Monday report that it was avoiding energy investment in a "longer-term lower" oil environment.
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The price of oil is near its lowest level in nearly two decades as the novel corona virus disrupts both supply and demand for the resource. It is a sudden development that threatens to revive the global economy.
Both West Texas Intermediate and Brent crude oil prices rose sharply this month as oil-rich Russia and Saudi Arabia are involved in a price war. Global demand has also decreased with the outbreak of the corona virus.
Credit agencies are now lowering their ratings for energy companies, many of which are heavily in debt. The demand for travel and transportation, such as airlines, has almost come to a standstill and has dealt another blow to companies that rely on oil sales. A barrel of WTI crude was trading at $ 23.20 on Monday, its lowest level in 18 years and a decrease of around 60% within a year.
The effects of low oil prices now go far beyond the energy sector. In reports to customers and interviews with business insiders, analysts and other insiders from the energy industry say that the effects of extremely low oil prices will affect the entire economy at a particularly vulnerable moment.
Who benefits from lower oil prices? It's complicated.
As with other shifts in supply chains and various economic sectors – including rate cuts and rate hikes – the effects of falling oil prices are complex. Finally, the shock of oil price spikes can be detrimental to businesses and consumers.
Ultimately, the positive effects of ultra-low-price oil on consumers outweigh the negative effects on companies, said Michael Hsueh, a foreign exchange strategist for energy commodities at Deutsche Bank.
However, success is usually more sudden for companies. And while the savings that end up in the pockets of consumers are increasing, it is less clear how and when these savings will be spent, Hsueh Business Insider said over the phone.
"But overall it should still be positive," he said.
Hsueh's WTI and Brent crude oil price estimates for the second and third quarters of this year are $ 22 and $ 25, respectively. With prices at this multi-year level, the oil industry will cut back on its investments as low prices swallow budgets, he said.
And the headwind is already fully visible for integrated oil giants. Exxon said last week that it would be about "significantly" reducing spending due to the conditions triggered by the proliferation of COVID-19 and the fall in commodity prices. S&P Global Ratings lowered Exxon's credit rating from AA +, AA, to AA reported.
"Companies in this area will stop doing business," Bill Baruch, founder and president of Blue Line Futures, a Chicago-based futures and commodities broker, told Business Insider, referring generally to oil and gas companies. "You are now in survival mode. We see that spending and rig activities are reduced quickly."
Baruch called the novel corona virus, also known as COVID-19, a "total black swan" referring to rare, serious events that investors did not see coming – or incorporated into their investment theses.
Where investors' expectations of the oil market stand – and how they position themselves
The oil price can also reflect longer-term expectations for economic growth, since oil is essential for cross-industry business activity. According to Nomura research, the United States is the largest oil producing nation in the world.
As the corona virus has spread all over the world, resulting in closures, travel bans and job losses, the International Monetary Fund on Monday The pandemic is expected to trigger a severe recession that will subside next year.
Investors adjust their game books accordingly. With little indication, the price of oil could rise significantly in the short term, the BlackRock Investment Institute said in a Monday report that "we avoid energy" high-yield investments in a longer-term lower oil price environment.
For the same reason, the report's authors said that given the "low energy exposure", it maintains an overweight position in Asian fixed income.
Some companies expect little significant price changes this year. Goldman Sachs' three-month forecast for WTI crude oil is $ 20 and the six-month forecast is $ 28. By that time next year, a WTI of $ 41 is expected.
The most serious recent declines even pushed an analystPaul Sankey of Mizuho to call for the possibility that oil prices could become negative, suggesting that producers would pay buyers to buy barrels of oil.
Bank of America meanwhile said on Monday in a note that it preferred buying crude oil "in dips", although the recent oil price shock "can have more lasting effects as it has put a significant strain on oil exporters' balance sheets".
For investors looking for a hiding place, companies that operate directly in the midstream sector or that transport and store oil and other raw materials such as natural gas are generally less exposed to price fluctuations.
Even so, they are not immune. In a message to clients on Friday, UBS analyst Shneur Gershuni said one of the main reasons for his recent discussions with midstream company management, which he covered, was that investment ("capex") would decrease.
Gershuni felt that most management teams "closely scrutinized investment plans to see what could be delayed," and expects more announcements from companies to lower forecasts.