Oil price: The Good, The Bad And The Ugly

Ijeoma Agudosi/Joseph Bakare/Agency Report

OPEC

The price of oil has lost more than half its value in six months and it has taken everyone by surprise. The shock has been deepened by the global oil cartel OPEC refusing to cut supply.

 

While theres feverish debate about how low the price can go, and how long these lows will hang around, energy companies like Santos have seen their share prices getting hammered. Credit Suisse equity analysts claim the oil and gas producer’s stock is worthless if the current price of oil and exchange rates continue. The investment bank’s hypothetical analysis found the company has a negative net present value of -13 cents with oil prices at $US55.20 a barrel and an exchange rate at 80.6 US cents.

 

Economic News

 

While the pundits lament a spiraling oil price there is a big upside for a country like Australia which is a net importer of oil. The commodity is a major input into the economy and lower prices will operate like a tax cut to simulate growth. So far prices have dropped by around a quarter and the savings should start flowing into the rest of the economy.

 

The IMF suggests that on the whole low oil prices “are good news for the global economy”. In an article posted in December they suggest there could be a 0.7 per cent increase in global GDP in 2015.

 

These results are heavily generalised and impacts will differ greatly between countries depending on their import/export status as well as the energy intensity of their economies.

 

On the flipside there is the key danger that stability in the global economy would be in jeopardy if oil dependent countries like Russia, Nigeria, Venezuela and Mexico were unable to recover from such low oil prices. The economies depend on oil revenues to grow their GDP and sustained low prices could see these economies face major problems.

 

The IMF modelled a range of “breakeven” oil prices for these countries, prices at which the governments can balance their budgets. These prices varied greatly; for Kuwait it stood at $54 but most interestingly for Saudi Arabia it was $106.

 

While the IMF report conceded appropriate policy responses will also vary, it was quick to add its own free-market based prescription, advising that this is an opportunity to reform energy subsidies and taxes.

 

Commentary

 

This week Finance News Network spoke with Westpac Banking Corporation (ASX:WBC) Chief Economist, Bill Evans about the trajectory of oil prices in the near term and what this means for Australia.

 

Bill Evans: We’re expecting oil prices to bottom out and start to lift.  As these extroadinarily low prices start to stimulate demand and at the same time a lot of supply will start to come off because of the high cost of some of this supply particulary in the US and in Latin America. So, supply coming down, demand starting to lift, that will mean prices starting to edge up. We wouldn’t expect prices to come up too much this year, around $70, but in 2016 it’ll be looking more like $90.

 

What sectors will benefit from these prices?

 

Bill Evans: We need to look at those sectors which will effectively benefit from a tax cut for the consumer. So retail would benefit, leisure. All those factors are important, and if we add interst rates coming down further then that would all go reasonably well for those sectors. Particularly as we move into the second half of this year.

 

Oil price shock

 

In the wake of the plunging oil price concerns are mounting over Santos Limited (ASX:STO). Credit Suisse equity analysts claim the oil and gas producer’s stock is worthless if the current price of oil and exchange rates continue. The investment bank’s hypothetical analysis found the company has a negative net present value of -13 cents with oil prices at $US55.20 a barrel and an exchange rate at 80.6 US cents. Shares in Santos fell 1.32 per cent on Wednesday to close at $7.45.

 

Doing deals

 

Decmil Group Limited (ASX:DCG) has scored a $65 million extension to an existing wellsite installation services contract from QGC Pty Ltd. The services provider will continue to work on the Queensland Curtis LNG Upstream Project in Queensland’s Surat Basin. Decmil will now move from project phase to operational phase supporting QGC with wellhead construction, logistics, material management and a range of construction services this year.

 

Buru Energy Limited (ASX:BRU) has advised the market that its agreement with Backreef Oil for the acquisition of a 50 per cent stake in an exploration licence located in the ‘Derby Block’ in Western Australia has come to an end. The deal was brokered in 2012 and with transfer of the licence still not occurring by Dec 31 the deal is off.

 

Last year’s gains

 

Liquefied Natural Gas Limited (ASX:LNG) was the best performing stock on Australia’s benchmark index in 2014. The liquefied natural gas developer’s share price rocketed more than 720 per cent over a year filled with acquisitions and project acceleration.

 

Striking oil

AWE Limited (ASX:AWE) says there is more oil potential in its New Zealand based joint venture in the Tui oil fields, 50km off the coast of Taranaki, New Zealand. The boost in reserves attributable to the Pateke-4H well comprises of an estimated 2.4 million barrels to be split between two other partners. New Zealand Oil and Gas has a 27.5 per cent interest, Pan Pacific Petroleum a 15 per cent stake with AWE as operator with a 57.5 per cent share.

 

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