Macro Market Insight - Analyst Blog by Isaac Leung - 07th January 2015
Cheap Oil: Who Benefits the Most?
Entire industrial verticals stand to gain worldwide in 2015 as the price of crude oil continues to slide since the OPEC meeting last November. Given that the International Energy Agency projects a more than 1.5m barrels per day (b/d) oversupply in Q1-Q2 2015, oil prices are free to sink further towards the marginal production cost of the cheapest producers in the Gulf (Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar).
In particular, the shipping, aviation, and agricultural sectors should benefit from an end to the long spell of high fuel prices. At least $1.5 trillion will be “returned” to consumers as a result of the sub-$60 per barrel oil.
The shipping industry will collectively benefit by at least $200m per day, according to the Baltic and International Maritime Council (BIMCO), the world’s largest association of ship owners. BIMCO’s analysis assumes an annual spot market of 257m tonnes (or over 4.4m b/d) of bunkers (maritime fuel for ships) and the Rotterdam price of high sulphur fuel oil falling from $578/tonne in Q1-Q2 2014 to $280/tonne in December.
Long-haul cargoes of cheaper oil shipped to the US and Asia from the Gulf and West Africa are also rising in volume and should bolster the long-beleaguered oil tanker sector. Daily earnings for a supertanker rose to almost $100,000 in December, compared to levels that barely met typical daily costs of $20,000 mid-year.
Falling fuel prices should lift airlines’ bottom lines, given an average 30% of airline costs is for fuel needs, estimated at 216m tonnes (4.7m b/d) in 2014. Jet fuel averaged $125/b in 2013 and peaked close to $140/b four times in 2011-13, but since December it has been selling for prompt delivery at close to $75/b. However, airlines with earnings in local currencies that have weakened against the US dollar will not see the full benefit.
Plus the drop in prices will only boost hedging counterparties. In terms of hedging strategy, airlines have ranged from Singapore Airlines, said to have its near-term supply fully hedged at $116/b, to Qantas and American Airlines, with none of their supply hedged. Nevertheless, the Dow Jones Airline Index rose by approximately 85% in 2014.
Agriculture globally stands to benefit from falling direct input costs (spot market diesel prices are down 40% since June 2014), a boon to farmers globally. However, farmers will also benefit indirectly as fertilizer prices fall; fertilizer production accounts for about 1.2% of global energy use, equivalent to about 2.5-3.0m b/d of oil consumption.
The pricing of fertilizers depends on which chemical process derives them and which source of supply or demand is playing the role of the swing producer or buyer. However, fertilizer prices generally follow coal, natural gas, and oil prices. Within the US, the US Corn Belt benefits the most from lower energy prices, given the Midwest’s agriculture is the most energy-intensive.
Casualties of the Oil Price Correction
In the US, with energy firms accounting for 4% of the S&P 500 index by market capitalization, and unconventional oil and gas for 17% of US high-yield bonds, there will be losers in the financial markets. Indeed, three of the 10 most profitable companies globally have been Exxon-Mobil, BP, and Chevron. Among producers, Venezuela is on the brink, with credit insurance swaps pricing a 61% probability of a sovereign default in 2015. There will be a 2nd round of effects via trade, as with S. Korean construction companies that have seen the flow of Middle Eastern contracts grind to a halt.
Meanwhile, there is the worrying sign that the global oil glut is due to receding demand growth. While forecasts are still for global crude oil demand to keep rising into 2015, the International Energy Agency has revised down its 2015 demand forecasts several times in the past year. Asia pointed the way as diesel and petrol usage stagnated in 2014, in part due to subsidy cuts in emerging Asia. Chinese and Japanese demand has been falling year-on-year, and price cuts may not reverse this.
The burden of tight markets is lifting, but the global adjustment will be challenging.
Isaac Leung is a senior economist on D&B’s Global Data, Insight & Analytics team. Based in the United Kingdom, he covers China, India, and other parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight products. His areas of interest include maritime economics. He has degrees from Cambridge University and the London School of Economics. Read more articles by Isaac Leung.Tulosta