Oil has dropped to a five-year low and investors, companies and essentially everyone will be affected. Some are rejoicing lower gas prices for the upcoming holidays, while others are losing money.
USA Today’s story by Gary Strauss had these details about the latest moves:
Crude oil prices accelerated their six-month slide Monday, plunging to fresh five-year lows after a key investment bank bearclawed the energy market, a major producer slashed its drilling and exploration budget by more than 20% and fresh reports pointed to slowing global economic growth.
The 4% drop in crude oil prices crimped Wall Street, pushing the Standard & Poor’s 500 Index down 0.7% to 2060 and igniting big losses among already hard-hit energy producers and oil patch stocks. The latest drop in oil is likely to fuel fresh cuts in gasoline prices in the weeks ahead, saving consumers, shippers and airlines billions. Oil prices have yet to find a bottom.
“We’re in a tailspin,” says Tom Kloza, global head of energy analysis at the Oil Price Information Service. “The world is facing a possible glut of oil in 2015. Consumers typically paid $470 billion-$480 billion for motor fuel between 2011 to 2013. We’re on track for about $449 billion this year and likely to pay $75 billion to $100 billion less next year.”
Gasoline prices, averaging $2.67 a gallon nationwide — vs. $3.26 a year ago — are likely to fall to about $2.50 before year’s end, Kloza says.
Cyrus Sanati wrote for Fortune that despite concerns about what the recent price drops mean, that in the long-term the oil industry will become more efficient:
The recent drop in crude prices won’t kill off the US shale oil industry. It’ll just make it more efficient.
Profit margins and break-even points are relative not only to the price of oil, but also to the cost of doing business. As oil prices drop, producers will undoubtedly renegotiate their ludicrously expensive oil service contracts, slash wages for their workforce and cut perks to bring their costs in line with the depressed price for crude. The demand for oil remains strong, which should provide an adequate floor for producers in the long run, but only after they get their finances in order.
How oil prices ever reached $100 a barrel still remains a mystery to many who have followed the industry for years. But the 40% drop in oil prices over the past six months has been shocking for oil bears and bulls alike. Why on earth did it fall so hard, so fast? There is plenty of speculation, ranging from the Saudi’s wish to “crush” the U.S. shale industry, to the U.S. colluding with the Saudi’s to flood the market in order to bankrupt an aggressive Russia and an obstinate Iran.
The New York Times story by Clifford Krauss that big oil companies are retrenching in order to remain profitable:
On the same day that the American oil benchmark traded around $63 a barrel, down more than 4 percent, ConocoPhillips announced it would cut investment spending in 2015 by 20 percent, the biggest sign yet that major oil companies are contracting.
The announcement came on the heels of BP’s notice that it would cut middle management and other jobs in the months ahead.
Both moves suggested that the 40 percent drop in oil prices since July had spread pain beyond small exploration companies that were highly leveraged and most vulnerable to oil price swings.
“We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,” said Ryan Lance, ConocoPhillips’s chairman and chief executive.
But even with the sharp cut in investments, the company projected that its oil and gas production would grow 3 percent next year because of recent start-ups of major projects in Canada, Europe and Asia, as well as increasingly productive wells being drilled in the Eagle Ford and Bakken shale fields of Texas and North Dakota.
That forecast, combined with the slow decline in drilling rigs deployed in fields worldwide, indicates that whatever hopes Saudi Arabia and other OPEC producers have that lower prices will lead to quick production declines are unlikely to happen before late 2015. The cartel decided last month to keep its 12 members’ production quotas steady, in a move that accelerated the oil price drop.
A drop in oil prices could be a boost to the economy as consumers have more disposable income. While damaging profits in an incredibly lucrative business, the decline will also help virtually every other company. It will be interesting to see how commodities based hedge funds and other investment vehicles do for the quarter. But overall, while oil companies are suffering, it’s good for the rest of us.
