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Falling Crude Prices Not Beneficial for All

By:
James Hyerczyk
Updated: Aug 1, 2016, 11:54 UTC

Crude oil prices are at it again, after rallying most of the first half of the year, it is set to finish nearly 15% lower in June. This is, once again,

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Crude oil prices are at it again, after rallying most of the first half of the year, it is set to finish nearly 15% lower in June. This is, once again, likely to lead to significant revenue shortfalls and cash flow problems in many energy exporting nations. On the other hand, consumers in many importing countries are likely to benefit from the price decline, giving them extra discretionary income to spend on other goods and services.

For nearly four years from 2010 until mid-2014, global oil companies were able to hold prices fairly stable, at an average of nearly $110 a barrel. However, since June 2014, prices have dropped considerably before reaching a low in January 2016 at below $27.00 a barrel for the first time since 2003.

At the start of the new year, crude oil declined more than 25 percent, the steepest such slide since the financial crisis, putting a hurt on oil drillers and producing nations alike. However, they kept pumping more oil into an oversupplied market, creating a record supply glut.

While major producers Saudi Arabia and Russia fought for market share, Iran came on board after international sanctions on Tehran were lifted in late January. In the meantime, U.S. oil continued to flow without obstruction into Europe for the first time. So basically, the situation has developed into a huge battle ground between OPEC, Russia and the United States.

Forecasters are now saying that lower demand because of a decline in global economic growth is likely to combine with increasing production to slow down the pace towards a balance between supply and demand. Estimates now show that prices could become range bound or under pressure into mid-2017.

Homeowners, car owners and transportation companies have benefited from low energy prices since it now cost less to heat a home in the winter, less to drive a car and less to move goods from one end of the country to the next.

Lower crude oil prices may be benefiting some, but there have been a few financial casualties. Russia, one of the world’s largest oil producers, loses about $2 billion in revenues for every dollar fall in the oil price. This is contributing to its shrinking economy and a steep decline in the Rouble.

In 2015, it was forced to raise its benchmark interest rate to 17% in order to prop up its currency. This move highlighted how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes. Since then, its interest rate has fallen to 10.5%. This relatively high rate means higher credit costs for Russian citizens for short-term loans and long-term mortgages.

Russia can’t afford to cut oil production because it will lose market share when importer countries ramp up their oil production.

Venezuela has been in the news lately because of the near collapse of its economy. On July 15, 2016, it was reported that Venezuela’s oil production plunged to a 13-year low in June as the economic crisis continued to erode the nation’s only source of export revenue.

According to the International Energy Administration, “further losses are expected in 2016.” A year-on-year decline in oil production of 200,000 barrels per day “looks unavoidable as foreign oil service companies reduce their activity and international oil companies face repayment issues and daily operational challenges.”

Some say mismanagement and government corruption have contributed to the decline in Venezuela’s oil industry, however, setting that aside for now, the country is losing oil related jobs causing rising unemployment and facing other humanitarian issues including the periodic loss of electricity. Some companies are being forced to pay in expensive U.S. Dollars which is hurting trade for food, medicine, clothing and housing.

Venezuela is also facing severe debt issues with more debt due in the third and fourth quarters. At this point, there are concerns the Venezuelan government may have to decide whether to meet its debt obligations or feed its people who are going hungry in the streets. With hard currency running low, it is unclear if those payments can be met.

Canada’s economy has not been immune to the effects of falling oil prices. They have contributed to subpar economic growth which is likely to limit Canada’s real GDP growth to 1.6 percent in 2016, according to The Conference Board of Canada’s Canadian Outlook: Spring 2016.

The impact of low oil prices is most apparent in investment expenditures, which fell by $17 billion in 2015. With oil prices expected to remain low the remainder of the year, investment in the energy sector is expected to fall by $11 billion in 2016 and remain flat in 2017. Oil and gas investment is not expected to recover until 2018, when oil prices are expected to start to reach profitable levels for Canadian companies once again.

In conclusion, net oil exporters like Russia, Venezuela and Canada will face negative impacts from lower crude oil prices. Russian consumers are likely to continue to suffer if its central bank is forced to raise interest rates to astronomical levels again.

With the value of its currency declining substantially, Venezuela’s citizens face a hard uphill battle. It has been nearly impossible to trade for food and medicine since traders are demanding the highly priced U.S. Dollar as payment. This is causing severe humanitarian issues for the country.

Canada’s reliance on the oil industry is slowing its economic growth. The most immediate impact of lower oil prices will lower energy exports. However, this loss will be partially offset by a boost to consumers’ disposable incomes and spending power through lower oil prices at the pump.

Additionally, the energy sector may continue to lose jobs, but new jobs may be created in the transportation sector and manufacturing may benefit from the low Canadian Dollar.

Overall, falling oil prices are dragging down the economies of many nations which is hurting global demand growth. A country like Canada will suffer over the near-term from lower prices because it relies on exports to these countries.

 

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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