IEA Warns Of Social Unrest As Oil Plummets — Too Much Of A Good Thing – Can Be A Bad Thing; Russia, Venezuela, Gold, Likely Big Losers; China, Japan, Philippines, Airlines, Transports, Manufacturing Winners
“Weak demand and oversupply in world oil markets raise the risk of global instability; and, the potential for financial default,” the International Energy Agency (IEA) warned today (December 12, 2014) — as it cuts its global oil demand in 2015. This report comes at oil prices hit a multi-year low — with Light Sweet Brent Crude trading at $63.09 and West Texas Crude at $59.17. “Continued price declines — for some countries and companies, make an already difficult situation worse,” the IEA said in its new report. The IEA forecasts that “Global oil inventories are projected to build by around 300M barrels in the first half of 2015…in the absence of any disruption.”
“The resulting downward price pressure would raise the risk of social and/or, financial difficulties,” as corporations and nations find it difficult to manage and pay back debt.
Winners And Losers: Declining Oil Price’s Effect Around The Globe
John Schoen, writing on the December 11, 2014 website hosted by CNBC.com, “writes that for most of the world [particularly Japan IMO] the tailwind of lower oil prices is helping to lift the pace of,” global economic growth. But, what is good for the goose — isn’t always good for the gander as the saying goes. “In Russia and Venezuela, falling prices have cut revenue from oil sales, hammering local currencies, stocking local inflation, and crimping economic growth”
“So, what happens if oil prices drop to as low as $40? Mr. Schoen asks. “To find out,” he says, “economists at Oxford Economics fired up their computer models to run projections on growth rates of 45 economies around the world. They started with a “baseline” forecast of $84 in 2015 — a number that until a few months ago — seemed like a reasonable forecast,” Mr. Schoen wrote. Oxford “looked at several ways that oil affects growth. Factors included how much oil a country produces and consumes, how big a role oil plays in overall energy demand, the impact on currency exchange rates, fuels taxes, and other factors.”
“After knocking down the price of oil in $10 increments, — the country seeing the biggest boost was the Philippines, which could expect its economy to grow at a 7.6 percent clip over the next two years, if oil were to fall to $40 per barrel. China and India were next in line as cheap oil beneficiaries, with growth rates of 7,1 percent and 6.7 percent respectively,” Mr. Schoen added.
“The biggest loser,” Oxford said was — Russia — “which would see growth shrink by an average of 2.5 percent annually over the next two years — even without factoring in a possible currency crash, and ongoing sanctions imposed against Russia by the U.S. and Europe.”
Mr. Schoen notes that “in the U.S., much of the boom in the new oil supply is coming from producers that are squeezing more oil out of the ground with improved technologies like hydraulic fraking, and horizontal drilling. While those techniques have breathed new life into the U.S. oil patch, they’re not cheap. And, a lot of equipment and manpower are needed to produce that oil…that has been paid for with borrowed money. That’s left some banks holding those loans — and their investors — looking closely at increased exposure on their books to suddenly lower oil revenues. A prolonged era of lower prices could also hit broader economies of the United States that rely heavily on the oil industry for jobs and consumer spending.”
“In Europe,” Mr. Schoen notes, “policymakers are struggling to revive growth and reverse a prolonged stretch of very weak inflation. The worry is that weak prices spark a bout of outright deflation — in which wages and prices begin falling — sending [their] economies into reverse.” “That’s less likely in in larger economies, where the savings from lower oil prices are more widely diffused through a broader base of industries ,” said Greg Daco, an economist at Oxford Economics.
With Oil Continuing To Fall — Where Is Private Investment Going?
Lawrence Delevigne, writing on CNCB’s December 9. 2014 website says “most private investment money managers who invest in energy, –think the price of oil will continue to fall — but, some see opportunities in related companies. “Oil is going to a new price point, because of the revolution in production,” said Bill Perkins, Chief Investment Officer at the energy-focused hedge fund Skylar Capital Management. Perkins believes oil could fall to as low as $45 a barrel; and, he is personally shorting the commodity, Mr. Delevigne wrote. Mr. Delevigne sees oil trading between $45-$80 in 2015. Mr. Prekins’s hedge fund focuses on natural gas — as he believes owning storng companies in this sector is a good bet…because of continued demand and production.” “Companies are harnessing new technology to destroy the traditional energy value chain,” Perkins said. “There’s a lot of money to be made on that.”
Morgan Stanley recently noted that: “the risk of oil prices moving lower into 2015 (as well as higher volatility) is now significantly elevated; and. by 2015, the market will be oversupplied and needs to find a mechanism to balance. The firm added that oil would need to fall to $35-$40 per barrel to stop production and rebalance supply.”
Other hedge-fund portfolio managers who believe oil will continue to fall include: Andy Hall of Astenbeck Capital Management, Paul Singer of Elliott Management, and Pierre Andurand of Andurand Capital Management. Andurand thinks crude could hit $50 a barrel in the first quarter of 2015; and, then rebound to a high of $70 in the fourth quarter of next year. “OPEC is not the swing producer anymore,” Mr. Andurand said, “U.S. shale producers are, but it will take more time to react to prices than OPEC — it’s a game-changer that will lead to more volatile prices, and bigger price ranges.”
Andurand isn’t as bullish on energy stocks as others, noting: “I expect that high-cost, highly leveraged shale oil companies will be at risk, there will be more (mergers and acquisitions) activity in the sector; and, some countries will be at risk of defaut.”
“Overall, energy stocks represent 14 percent of equity hedge fund portfolios, a relatively large position, and 10 percent of the top 100 most common long positions overall,” according to Credit Suisse.
Airlines, Transports, Manufacturing, China, Japan, Philippines Big Winners; Russia, Venezuela, Gold Big Losers
All things being equal, one would think airline stocks, transports that use oil, manufacturing, and Japan and the Philippines, as well as China would be big beneficiaries and a good place to get an investment footprint; while Russia, and Venezuela — among others will be big losers. One might also short gold, as Russia, Venezuela and others sell some of their physical gold deposits in an attempt to offset some of the loss in oil revenues, and buy some time. V/R, RCP