Goldman Sachs 2008 prediction that oil would reach $200 per barrel seems a lifetime ago, with oil currently trading close to multiyear lows.
The recent decision to lift Western trading sanctions against Iran which, in turn, will see Iranian crude exports come back to market, has piled even more pressure on an already tumbling oil price, which now trades close to its lowest level since 2003. The dramatic 70% fall has been attributed to over supply as opposed to lack of demand, and yet there is no clear indication that OPEC (Organisation of Petroleum Exporting Countries) will move to support the tumbling price by cutting production. Consequently, as there always is with any movements in underlying asset prices, there have been a variety of winners and losers.
Perhaps those most obviously caught on the wrong side of the devaluation have been the worlds oil producing countries, such as Russia, which loses about $2bn in revenues for every dollar fall in the oil price and is now in recession, and Saudi Arabia, whose stock market, the Tadawul All Share Index, has halved in value since the summer of 2014. It will also come as no surprise that the major oil companies BP, Royal Dutch Shell, Exxon Mobile, Schlumberger and ConnocoPhillips to name just a few, have suffered weaker profits and will struggle to maintain their current dividend policies, whilst their smaller counterparts have become potential takeover targets as they battle to stay in business.
Conversely, and less covered in the media, many are also benefitting from lower oil prices as the fall triggers a large-scale international redistribution of income, from oil sellers to oil buyers. India, Egypt and Indonesia have all been able to cut their subsidies on fuel, airlines have seen costs slashed and, closer to home, motorists are now at long last paying far less at the pump, even though the ˜rocket and feather pricing phenomenon remains true to form! Other net oil importers such as China should also see their economy benefit.
From an investment perspective, the steep fall in the oil price has weighed heavily on global financial markets which have proven over-reliant on the energy and mining sectors. It is forecast that the oil price could fall even further as supply continues to outstrip demand in the short term. One thing that the recent market volatility has served to highlight is the benefit of proper diversification within an investment portfolio, to ensure that the effect of any stockmarket volatility on returns is limited.
Should you wish to discuss any of the above commentary in further detail, or are considering adjusting your investment strategy in general, then please contact our investment management team on 01604 621421.