Falling oil prices: Boon or bane for the economy?
Crude tanker industry indicators amid falling oil prices (Part 4 of 16)
November oil prices
Oil prices recorded a drop of 22.5% to its 52-week low of $53.50 in December. On a year-to-date basis, oil prices have dropped 40.1%. With the price plunging to almost half its levels in the past six months, consumers are cheering, producers are agitated, and economists are wondering if this is a good or bad situation.
Some believe a supply-and-demand imbalance has caused this situation. US domestic production has risen higher than the production of any OPEC (Organization of the Petroleum Exporting Countries) member except Saudi Arabia. Global demand has experienced a slowdown due to stalled global economic growth. As a result, oil prices have been on the downfall.
Impact and behavior of world economies
Russia’s energy minister commented that the fall of crude prices below $50 per barrel will have a negative impact on the economy’s oil and gas sector. The country’s Economic Development Ministry downgraded its 2015 oil price forecast to $80 per barrel. Oil and gas exports account for about 50% of Russia’s revenues.
In addition, the oil-rich Gulf states recently commented that it would not cut crude production. They blame tumbling prices on speculators and producers outside OPEC. In November, OPEC decided to keep its target output of 30 million barrels per day unchanged, leaving the market to balance itself without the group taking action.
India is also benefiting from the decline in oil prices. It has accelerated the disinflationary process. Also, the subsidy burden for the government of India will decline significantly because of the fall in crude oil prices, which will help contain the fiscal deficit.
Impact on companies
As oil prices retreat, crude tanker companies such as DHT Holdings Inc. (DHT), Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), and Nordic American Tanker Ltd. (NAT) will benefit as they record lower bunker expenses and thus operating costs. Also, the broader index, the Guggenheim Shipping ETF (SEA), will benefit as the winter sets in and demand for oil rises.
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