Oil: when does good news become bad?

What does the excess of oil tell you?  Source: Google Images

What does the excess of oil tell you? Source: Google Images

Continued crash in oil prices, with WTI breaking through stops at $47 to reach another low:

We're awash in oil!  Source: thinkorswim by TDAmeritrade

We’re awash in oil! Source: thinkorswim by TDAmeritrade

The recent press (e.g. here and here) is getting ambivalent, in my opinion.  What was once a definite ‘good thing’ for the world, and the US consumer, has now become a ‘well, let’s think about this’ as the price has continued to fall.  In particular:

  • Who’s definitely worse off: our usual villains, such as Russia, Venezuela, Iran, etc.
  • Who’s definitely better off: emerging economies which are big oil importers, such as India, Philippines, China.
  • Who was definitely better off, but maybe not so much anymore: developed countries.  Why?
    • The consumer: Joe Bloggs is definitely better off at the gas pump, and maybe for purchased goods as well (e.g. transportation and manufacturing costs are lower).  For those in the US in particular, the strong dollar is an added bonus for the consumer.
    • The producer: Company ABC might be better off, depending on its relative dependence on energy.  For the airlines and shippers, as well as SUV producers, the lower oil price is a god-send.  For exporters, transit costs are lower, so should be helped.  However, a strong USD is bad for exporters, as well as multinational corporations with much sales overseas.  Worst of all are the oil companies themselves, obviously; some of these (more debt-laden, shale players) will likely go bankrupt.
    • The employee: decreasing oil prices lead to lower inflation, which means higher real wages for employees.  Thus, they should be happier – if they still have a job.  All those new jobs created in North Dakota and elsewhere, based on now-uneconomic shale oil/gas, are likely at-risk.
    • The investor/pension-holder: hmm – what to do?  Much has been written that oil/gas companies are HUGE providers of capital expenditure (thus needing investment, and paying returns) and dividends (helping those pensioners).  All of that is at risk now, with share prices falling accordingly.  All of the items above need to be in the investor’s mind as well – strong USD; better global growth prospects, particularly in emerging economies (partially offset by the USD); generally better news for developed countries, though maybe not too good.

In sum: while the falling oil price was once universally cheered by Western media, the news has become more mixed as ramifications of much lower oil prices are digested.

If only things were more black and white, eh?

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2 thoughts on “Oil: when does good news become bad?

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