Oil Price Fall

Monday, December 01 2014

The oil price has fallen substantially in recent months with a marked acceleration in the last week or so. We have summarised the major factors influencing the decline below:

  1. OPEC decided not to reduce production in response to the lower prices with the market concerned they will seek to damage the outlook for competing energy sources (i.e. shale gas) and competing oil suppliers (i.e. Russia).
  2. Recent demand has been softening with sluggish economic growth weighing on demand.
  3. The recent extreme volatility has seen some highly leveraged speculators forced to exit their positions which has created even more selling pressure.

We note on fundamentals the oil price appears oversold. While the US oil shale has created new supply and demand has softened, the major oil fields in the Middle East are still in decline and the global economy is still growing. Oil continues to play a major part in the global economy and significant reserves must be found as existing fields are depleted. If a low oil price reduces capital investment then supply will contract and the oil price is likely to normalise quickly.

spacer
2014-12-OilPriceFall-1a
spacer
2014-12-OilPriceFall-1b
spacer
2014-12-OilPriceFall-2a
spacer
2014-12-OilPriceFall-2b
spacer

 

While the oil price fall is significant, we see it potentially beginning to overshoot. Nonetheless it has a range of implications for investment decisions including:

  1. Will existing oil companies need to raise capital to reduce debt position? From our perspective we think Origin has some risk given it is carrying debt while completing its LNG project. If the oil price stays at current levels, then there is a small risk S&P might encourage them to raise some capital. The share price seems to be factoring in this risk in our view. Woodside has little debt and BHP’s balance sheet is in good shape.
  2. Some sectors will benefit including transport and consumer stocks. We have been buying Flight Centre which should see some benefits from the lower cost of travel and more cash in consumer’s pockets.
  3. Does the fall have implications for global growth? A lower oil price should be stimulatory for global growth but is the fall a signal that growth is slower than anticipated? Deflation concerns in Europe have grown and the soft oil price feeds into these concerns. Certainly inflation does not seem to be an issue at present. Our focus is on finding individual companies which offer growth or those which are exposed to better growing regions such as the US.

 

 

 

IMPORTANT NOTE: This information has been prepared by DNR AFSL Pty Ltd ABN 39 118 946 400, an Australian Financial Services Licensee, Licence Number 301658. Whilst, Dalton Nicol Reid has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. This document is not intended to provide you with personal advice and in providing this information, Dalton Nicol Reid has not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser. Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this document. Past performance is not indicative of future performance. Total returns shown are based on Dalton Nicol Reid’s model portfolio and have been calculated before taking Dalton Nicol Reid’s fees into account. No allowance has been made for taxation.

 

Print this article