The falling price of oil has caused “acute and concentrated pain” for oil exporters and energy companies, but the end could be in sight, a report from BlackRock suggests.
The BlackRock Investment Institute said in a report last month that the price of crude was bottoming, with modest gains expected in 2016.
Cheaper oil had helped retail industries and nations that imported the commodity, such as India and Japan, the report said. But countries that exported oil, such as Venezuela, and businesses with limited cash buffers and restricted access to debt had been hit hard.
The price of oil has been on a roller-coaster ride, with the globally recognised benchmark Brent crude falling from $115.70 (£75.42) per barrel on June 19 last year to less than $50 in January.
The price has now recovered somewhat, climbing to more than $60 per barrel last week, but the level is still well below that just months ago.
BlackRock is favouring the super oil majors for their strong balance sheets, high dividends and integrated business models, while oil services firms are largely being avoided.
“[Oil services companies] may appear cheap, but we believe a lot more pain is to come,” the report said.
“Oil explorers are shifting into survival mode, cutting capital expenditure and negotiating lower servicing rates.”
The company added that oil producers would also be in for a rough ride.
The report categorised producers into three groups: countries that have accumulated large amounts of foreign assets, such as Saudi Arabia, United Arab Emirates and Norway; oil producers with smaller fiscal cushions, such as Mexico, Malaysia, Bahrain, Oman and Colombia – which may revert to austerity and increased borrowing; and finally those with little cash and poor access to international debt markets, such as Venezuela and Nigeria.
“Energy makes up 97 per cent of Venezuela’s goods exports, yet its foreign reserves are a paltry 2 per cent of GDP,” BlackRock said.
The report, ‘Concentrated pain, widespread gain – the dynamics of lower oil prices’, pointed to a consumption boost beyond savings at the petrol pump, based on previous oil downturns.
US housing could be set to uptick due to rising consumer confidence and improved cash flows, as well as a decrease in mortgage rates because of lower inflation.
Also, purchases of durable goods have surged during previous downturns, with people taking advantage of the drop in the cost of consumer financing.
The knock-on effect should also be swift. The report stated any petrol price decline that was part of an extreme fall of more than 15 per cent in a quarter “tends to generate a bump in consumption in the next quarter that is four times as large as the effect of milder price falls”.
While the “winners” enjoying lower operating costs – the transport industry, retailers, restaurants and other consumer discretionary stocks – had already rallied, BlackRock thought they could climb higher as analysts upgraded their earnings estimates.
With the falling price of oil contributing to lower inflation across many countries, emerging market oil importers have seen their inflation levels track even US levels in the past three years.
BlackRock said agriculture and food prices were also likely to fall as a consequence.
