The sharp fall in the price of Brent Crude yesterday to less than US$48 a barrel exaggerates the pattern of the last few weeks.
The price of this key industry benchmark has fallen from almost US$57 four weeks or so ago. West Texas Intermediate, its broad US counterpart, is down to under $44.
- Oil price falls to nine-month low
- Shale gas supply seems to be putting a ceiling on the oil price
- Fall in price will hurt oil companies but may lift the consumer sector
Behind the fall
Michael Baxter, economics commentator for The Share Centre, an authorised and regulated provider of share services to the private investor, points to a rise in supply emanating from shale gas production as a factor behind the fall.
Markets may have underestimated the extent and speed with which shale gas production can be turned up and down, he suggests. “When the oil price was less than $40, as it was 15 months or so ago, shale gas producers eased back, cutting production, leading to rising oil prices.
However, it is beginning to look as if the ceiling to the oil price in the current environment is around $50, at which point shale gas producers start to ramp up production.”
- The oil price has hovered in a $57-$46 corridor
- The cycle seemed to be slowly turning upwards
- Tripling in BP profits misleading
Oil companies hit but consumers could profit
If the oil price stays below $50 for an extended time-period then the oil companies may see a hit on profits, ventures Michael Baxter.
On the other hand, the slide in the price, providing it is not reversed in the next few months, should lead to a corresponding fall in inflation. This will help households and should support the retail sector that has been struggling of late, he believes.
Industry sectors that would benefit from a fall sustained over several months include heavy oil users such as plastics, packaging, logistics, auto manufacturers and airlines, notes another market commentator.
As a general rule of thumb, a fall in the oil price should support the global economy. Oil exporting countries tend to have a higher savings ratio than oil importing countries.
In theory, a fall in the oil price should have the effect of re-distributing gross domestic product from oil exporters to importers. The differential in the savings ratio should lead to a rise in global aggregate demand.
The impact on the FTSE 100 may be less positive, however, he cautions, since many of the companies listed on the index are in the energy business.
Warning: the oil cycle is not dead
He moves on to warn against complacency on the part of those who believe the world has entered a new golden age of lower oil prices.
“Don’t fall into the trap of concluding that the oil cycle is dead, or that thanks to shale gas it will never rise above $100 again,” he concludes.
“Unless the cost of renewables and energy storage falls rapidly in the next few years, the oil cycle will turn again. The cycle is not dead, rather it is sleeping. Maybe, and this could especially be true with the oil industry in Norway, it is pining for the fjords.”