Oil Won’t Trade This Low Forever… And The Chinese Know It!

Barrels Oil

As we all know, the oil price has plummeted to a level we haven’t seen in more than five years and this will obviously have severe consequences for both the USA and the Eurozone as major economies. At the current oil price, a lot of the shale gas oil and gas producers are nearing the territory where they become unprofitable and might have to shut down their operations. This means that a lower oil price is both a curse and a blessing for the States. A lot of people might lose their jobs if some higher cost wells will have to be abandoned but on the other hand the lower oil price might be beneficial to other sectors of the American industrial economy.

The Federal Reserve isn’t worried yet as it said that it expects the low oil price to indeed fuel the further recovery of the American economy as the input costs will go down. The central bank expects its citizens to spend the extra money they will have at the end of the month instead of saving it. That’s an interesting thought as we would be extremely surprised to see a 1 on 1 trade-off whereby the entire amount of energy savings will be used to increase the consumption pattern. Additionally, a lower oil price will reduce the inflation rate and that might be a side effect which wouldn’t make the Federal Reserve happy as it plans to increase the benchmark interest rates from next year on.

William Dudley NY Fed

William Dudley, NY Fed. Source

The Fed is also shrugging off the jobs problem stating that for now it doesn’t think the drop in the oil price will intensify and there won’t be a near-term reduction in oil and gas investment in the USA. This might be a very optimistic point of view as several companies need a higher oil price than $65 per barrel to be viable and we wouldn’t be surprised to see quite a few job cuts in 2015 if the current oil price persists.

The impact of the low oil price is much more positive for the Eurozone as all Eurozone countries are net importers of oil. However, one cannot ignore the currency exchange rate factor (see next image). The oil price might have dropped by 40% in US Dollar, but the fall in the oil price was much less when looking at the oil price in Euro as the US Dollar continued to strengthen versus the Euro. The cheaper oil will obviously influence the inflation rate as well, and this might very well be Mario Draghi’s worst nightmare as he’s desperately trying to get the inflation rate up to its desired level of 2%. However, the falling oil price will also boost the GDP of the Eurozone and according to preliminary estimates the current drop will add roughly 0.3-0.4% to the GDP in the first year after the lowered oil price and will add approximately 0.8% over the first three years.

Oil Price Chart

Source

That’s obviously very encouraging as a higher economic growth rate might be much better for the public finances of the member states of the Eurozone as well as helping those countries to keep its Debt/GDP ratio under control. It looks like the Eurozone is gearing up for a positive perfect storm. A cheaper Euro will be good for the export of goods and services whilst the lower oil price will reduce the initial production cost of several export-related goods. If you throw the lower interest rates into the mix as well, you’d almost start to think the Eurozone might be ready to benefit tremendously from the low oil price.

Another country which is taking advantage of the oil price is China. The country has stated it wanted to more than double its strategic reserves of oil inside China, and we have heard several reports from inside the sector that China is effectively stepping up the plate and is buying huge amounts of crude oil at fire sale discounts. This is clearly visible in the charter rates of oil tankers which have increased exponentially.

Per Reuters Africa:


Average VLCC earnings on the Middle East-Japan route this
year are at the highest level since 2010, said Ralph
Leszczynski, head of research at Italian shipbroker Banchero
Costa.


 “Average earnings on the Middle East-Asia route so far in
2014 are $22,000 per day, against $32,000 per day in 2010. But
this is still way better than the last three years,” he told
Reuters on Friday

 

There’s a binary outcome for the current oil price. Either you panic or you try to see the advantage and opportunity of the low-cost oil. China is taking advantage of the situation and even the inflation-minded currency blocks like the USA and the Eurozone are seeing the advantages. Just like a falling gold price, a dropping oil price could be something to take advantage of during the tax loss selling season.

>>> Check Out Our Latest Gold Report!

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

Follow us on Twitter @SproutMoney




via Zero Hedge http://ift.tt/12WcbTy Sprout Money

Leave a Reply

Your email address will not be published.