A drop of the good oil

3 min read

Oil prices and sharemarket values seem to have been moving in tandem since the start of the year leaving many wondering if falling oil prices will have a negative impact on sharemarkets on an ongoing basis. Tim Rocks, Head of Market Strategy and Research, believes falling oil prices are likely to be a positive overall and looks at four reasons it is unlikely to cause sharemarket strain in the longer-term.

  • Too much supply for the same demand

    The drop in oil prices is a result of its supply – not demand – so isn’t an indication of consumer concerns and in turn, economic problems. Oil supply has dramatically increased, particularly in Iraq and Saudi Arabia when you consider Bloomberg data on oil production. Countries like Russia, China and the US have also picked up production in the past few years and Iran is likely to add further to this in 2016 due to the end of sanctions. In the past, the Organisation of Petroleum Exporting Countries (OPEC) protocol was to lower production in times like this to maintain higher prices but OPEC has lost influence and countries like Saudi Arabia have been unwilling to reduce production. This means oil prices are likely to continue to be low as a result of the large supply.

  • Oil is good for motorists

    Cheaper oil means cuts to petrol prices so motorists have more money to spend elsewhere. According to Datastream, Australians spent $4 billion less on petrol in 2015 compared to 2014 and will potentially spend $3 billion less again this year if current prices continue. Lower petrol costs don’t just benefit your daily commute. It means lower transportation costs for goods and hopefully in time, lower purchasing costs for consumers.

  • A low risk to the US economy

    Cheaper oil may create challenges for energy producing countries. For example, it is around 40% of GDP for Kuwait, Iraq and Venezuela (Source: Datastream). Investors may wonder what this means for the US as an oil producer, given the influence its economy tends to have on global sharemarkets. The US energy sector is less than 1% of the economy, despite its expansion, so the prices are unlikely to have a major impact on the value of the US economy and in turn, global sharemarkets.

  • Financial support for producers means lower prospect of defaults

    Energy producing companies are also likely to feel the pinch from lower oil prices compared to returns in the past. That said, those companies are likely to be buffered to an extent to assist in preventing them from defaulting in the following ways.

    • Interest rates are very low allowing companies lower repayment for debts.
    • Some companies have been able to extend the timeframe for debt repayment to 2017 and beyond to reduce heavy repayment this year.

For more information about oil prices and your investments, please contact BT Financial Group.

This information is current as at 29 January 2016.

This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Projections given above are predicative in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. Information in this document that has been provided by third parties has not been independently verified and Westpac Financial Services Limited is not in any way responsible for such information.

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