Notwithstanding the squabbles between energy superpowers which send markets up and down a price rollercoaster, we wanted to look further than the next news cycle.
After all, many economies and industries have a long term relationship with oil prices, for better or worse. Better understand why this marriage is fraught with tension than just be a bystander.
So the Economic Research Department at Euler Hermes analyzed the reasons underlying the oil counter-shock and gauged long-term consequences. The team produced two reports. First, we focused on the impact of prolonged low prices on the global economy. Second, we offer insights on the situation in the world’s biggest producer – the US.
And here’s a quick summary of what you can learn from our special reports.
As for the ‘why’ question, the analysis yielded three main causes which drove the plunge in prices: oversupply (60%), sluggish expected demand - especially from China - (30%), and speculation (10%).
Moreover, second-round effects kick in, affecting various countries, markets and industries. We track a myriad of less-than-favorable consequences.
Emerging Markets: Depleted reserves, abandoned projects
Current account deficits widen, for example in Saudi Arabia and Venezuela. Currencies might depreciate (although not at the same rate) and as budgets come under pressure, the fiscal space at the disposal of governments shrinks, which causes a higher credit risk. Depleted reserves in countries such as Equatorial Guinea, Gabon, Angola, Oman and Venezuela should remind the world of the risk of default. Then there is a rise in the risk of social unrest in Venezuela, Russia, and Algeria, to name just a few of the usual and unfortunate suspects.
Sectors: Machines of de-construction
Sector wise, the Energy and Machinery sectors are direct victims of this protracted period of cheap oil. USD200bn of lost capital expenditures and investment in the oil sector is an awe-inspiring figure.
Yet there is more.
The fall in oil revenues leads to fiscal consolidation and the cancelation or delay of many state investments, notably in the Construction sector. This is particularly relevant for net exporting countries in the Persian Gulf: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman.
US: The war of independents
As for the US, the country specific report notes that the American oil industry has to gear up for looming turmoil on the back of an all-time high production. It highlights an increase in insolvency risk to certain tiers of providers and core companies of the energy sector. The main culprits: dropping revenues and plummeting margins of independent U.S. oil producers (USD -10bn in 2015).
U.S. oil production went up +25% on a yearly average between 2013 and the beginning of 2016. However this growth has been funded at the cost of soaring indebtedness of U.S. oil companies operating new oil rigs.
Since last year, banks’ restrictive measures in granting further loans to already highly indebted U.S. oil players have forced the latter to focus on the most productive rigs at the expense of others, some of which are being closed down.
U.S. oil companies, especially smaller ones, still have to cancel part of their Exploration & Production (E&P) investments (-13% in 2016 after -28% last year) against a background of a price war with Saudi Arabia and Russia.
While talks of output freeze continue between some of the US’s main competitors (and no love is lost between Saudi Arabia and Iran), the current global oil glut does not help put an end to this gloomy trend.
Expect more frayed nerves down the road.