The oil crisis has captured much of the financial world's attention over the last six months or so with Brent oil, the global benchmark, having more than halved in value since June last year.
The saga, caused by a massively oversupplied marketplace coupled with waning demand, has equity markets around the world on edge with investors fearing what could happen if the commodity's price falls any further. Now changing hands for around US$51 a barrel, some analysts have said it could bottom out at US$40 while others fear it could be headed for US$20.
Indeed, there are plenty of reasons to be concerned about the slump, but there are also a number of positives that could be taken away. To clear up some of the uncertainty surrounding the situation, here are a few pros and cons of the falling oil prices.
Cons
- A number of non-OPEC oil producers could be forced from the market as their projects become uneconomic. This could certainly impact companies such as Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and Senex Energy Ltd (ASX: SXY).
- Billions of dollars worth of liquefied natural gas (LNG) projects could also be shelved. As an example, shares of Liquefied Natural Gas Ltd (ASX: LNG) ("LNGL") have plummeted 55% over the last four months based on concerns that cheap shale gas from North America will become uneconomical.
- There could be enormous geopolitical consequences. If projects are shelved, workers will be laid off which will increase the rate of unemployment in net exporting countries, which could cause contagion-like ripples throughout the global economy.
- The budgets of net exporters, including Russia, Iraq, Iran and Venezuela, are also at risk. This could also send ripples throughout the world-stage.
- Clearly, investors are fretting which is causing a high level of volatility in equity markets around the world.
Pros
- Consumers are benefitting at the petrol bowsers with fuel in Sydney falling below $1 a litre for the first time in six years earlier this week. These savings could also spur activity in the retail sector, benefiting companies such as JB Hi-Fi Limited (ASX: JBH).
- Lower oil prices could fuel economic growth in crude importing countries, including China. As highlighted by The Australian Financial Review, the World Bank has said that a 10% drop in oil prices could increase gross domestic product (GDP) in oil importing countries by 0.1 percentage points to 0.5 percentage points. Oil has fallen by more than 50% over the last six months and while the World Bank's scenario cannot simply be multiplied, it gives a good indication of higher GDP.
- Companies that have oil and fuel as a significant expense will benefit substantially. Shares of Qantas Airways Limited (ASX: QAN), as an example, have risen 102% over the last three months. Lindsay Australia Limited (ASX: LAU) and Automotive Group Holdings Ltd (ASX: AHE) could also benefit.
- The tumbling oil price, together with the depressed iron ore price, could play a role in determining whether the Reserve Bank reduces interest rates in 2015 which would be excellent news for borrowers and income investors
- The volatility being caused by the waning oil price is creating fantastic opportunities for long-term investors to pick up high-quality stocks on the cheap – including the one our top investment advisor has just named his top stock for 2015!
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