Just as there is a consequence to every action or two sides to every story, there are contrasting repercussions due to the precipitous oil price drop in the last year. This post takes a look at some such flip sides to see who is benefiting from the recent rout…and who is not.
The below image shows how the US is seeing a varying benefit from low oil prices across the country. Low oil prices are negative for employment in eight states such as Texas, Oklahoma, and North Dakota – where energy-related employment is strong – but positive elsewhere. Low oil prices are also a boost to the broader economy – through the medium of greater consumer disposable income, decreasing energy costs for firms, and higher capital investment and hiring, among other factors.
On the flip side, oil and gas companies unsurprisingly feel the pinch the most as capital expenditures are slashed to limit bloodletting, while material job losses in the oil and gas sector provide a drag on the economy. In summary, lower oil prices are a net-positive – but unevenly distributed – benefit for the US.
The flip-flop of fortunes is also illustrated to great effect by the below image, which assesses the global impact of lower oil prices. While the IMF projects that lower oil prices this year could boost the global economy by 0.7%, this benefit is by no means evenly spread.
Net oil-importing regions such as the US, Europe, and Asia are set to be the recipients of a sizeable $900 billion stimulus, while oil-exporting nations are set to fund it. This wealth transfer is most starkly exhibited by the loss of $357 billion by the Middle East this year…and a $393 billion gain by Asia:
Next up is a trend which highlights the predicament faced by oil producers in the US: whether to weather the storm and keep on producing in a lower price environment, or whether to delay operations and await for more favorable market conditions. The result of this conundrum has given birth to the buzzword, ‘fracklog’.
For rather than fracking wells now, companies are deciding to leave the oil in the ground, awaiting higher prices. The below image from Bloomberg shows 4,731 US wells are drilled but uncompleted (DUCs), which equates to 322,000 barrels a day of oil not coming to market. The usual three suspects of the US fracking boom – the Permian, Eagle Ford and Bakken shale plays – account for more than 3,400 of the fracklog.
Finally, we finish with a look at the flip we have seen along the forward curve for crude oil in the last few months. While nearer-term prices have been rising as expectations of slowing US oil production materialize, longer-dated prices have been dropping.
This ‘flattening’ of the forward curve is indicative of increased hedging activity, as US producers are taking advantage of the recent rally in nearer-term prices to lock in prices for next year and beyond. In addition, after the near-term prices had been dragged to six-year lows earlier in the year as US inventories ramped up, the unwinding of the contango in the market is indicative of of these oversupply fears abating.
As with everything in life, there are winners and losers, and the recent rout in the oil market is no different. These four aforementioned flip sides should be closely monitored in the coming months, for the oil market will be impacted by these factors – regardless of if they change their tune, or become a broken record. See you on the flip side!