World Oil Prices Spilling Over the Investment Landscape

Concerns as to whether ‘the storm has passed’ is how Jorge Montepeque, Global Director of Market Reporting at Platts summed up current industry sentiment in a recent webinar we hosted where we discussed the impact of falling oil prices.

Based on discussions with oil producers globally, Jorge considers this storm period to have been when prices fell from $110 to $60 USD per barrel.  Now the industry is entering a “new normal,” as prices stabilize around the $40 - $50 mark.

Market Forces

The decision by the Organization of the Petroleum Exporting Countries (OPEC) to maintain production and allow market forces to determine price adjustment, has led to a degree of rationalisation with prices beginning to settle lower. Jorge noted that throughout his career the price of oil has touched $10 a barrel at least three times, indicating that after a period of excesses even deeper declines than what we’ve seen so far could still be experienced.

There are, of course, winners and losers. Some countries have been subject to major budgetary impact, but others, particularly in Latin America, Asia and Africa, who depend on imports, will benefit.

Similarly, some consumer industries like airline and haulage firms may have benefited, with a degree of upside associated to their individual hedge positions. On the other hand, some of the major oil producers have had to review their budgets in order to cope with the current price environment.

The unusual environment is also fostering growing volatility in the Brent-WTI spread. Current trends showing lack of storage capacity was mentioned as another factor building up pressure to consider opening up to exports in the US.

U.S. Oil Stocks Hit Highest on Record

Careful Consideration of Factors

Christian Esters, Senior Director, Sovereign Ratings at Standard & Poor’s Ratings Services said that recent oil price fluctuations have had a less significant impact on a country’s sovereign rating.

Monitoring a country’s fiscal position and GDP per capita, as well as GDP growth, provides a less volatile view than the prevailing market might suggest.

From a fiscal perspective, those countries with a strong external asset position, such as Abu Dhabi, Qatar and Kuwait, have sufficient buffers to offset any detrimental effect from low oil prices. Conversely, Angola, which is 95% dependent on oil exports, has been appropriately downgraded. 

Hydrocarbon sector as a share of Exports/Revenues

The effects of lower revenue and depreciation of local currency should also be factored in. Standard & Poor’s anticipate some contraction of GDP and lower current account balances across all oil producing countries. The real impact of this will still depend upon the unique mitigating factors within individual countries.

During our recent webinar, Jorge, Christian and I spoke in greater depth about these topics and more. Watch the replay here.

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