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Repercussions Of Lower Oil Prices On Energy Sector

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Published: November 29, 2014 at 11:11 am EST
By: Micheal Kaufman

The decision by the Organization of Petroleum Exporting Countries (OPEC) to maintain production at 30 million barrels of oil per day came as a shock for most oil companies. As a result crude oil prices fell drastically and West Intermediate Texas (WTI) was down 10% yesterday, to $66.15.

The fall in oil prices has severely affected numerous economies and companies. It was far more than what was expected by experts. Last month, before deciding to take on investment projects, BP plc. (ADR) (NYSE:BP) assumed Brent crude oil prices would be at $80. Goldman Sachs had predicted the price of WTI would hover around $75 for the first three months of next year. Russia had expected average crude oil prices to remain at $100 and had planned its budget accordingly.

US energy stocks also suffered as investors dumped them. Among the most-affected companies were Continental Resources (NYSE:CLR), Exxon Mobil (NYSE:XOM), BP, and Royal Dutch Shell plc. (ADR) (NYSE:RDS.A). Continental Resources saw its stock decline by 19.9% yesterday, to $41. Exxon, BP and Shell are currently trading at $90.5, $39.32 and $66.4, each falling 4.1%, 5.4% and 6.9%, respectively.

The most influential member of OPEC, Saudi Arabia had indicated that the curb in oil production would have allowed the US to capture Saudi Arabia’s market share. Thus, it was necessary for OPEC to maintain production, driving down prices and making it unprofitable for a lot of US companies. Companies such as BP and Shell are clearly suffering due to the lower oil prices as they have higher costs of production.

According to a Shell spokesperson, the company, before taking on an investment, must be certain that it is able to break even at $70 per barrel.

Although many oil producers are expected to suffer, oil consumers are bound to benefit. According to the International Air Transport Association, jet fuel constitutes around 30% of an airline’s cost, thus allowing the global airline industry to save $7 billion on fuel costs compared to 2013. This has seen airline companies such as Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc. (NASDAQ:AAL) reporting year-to-date (YTD) returns of 32.08%.

The decline in commodity prices has also led some airline companies to hedge their current positions and lock on lower oil prices in order to gain if prices were to rise again. One such company is Ryanair Holdings plc. (NASDAY:RYAAY), which hedged 90% of its expected full-year consumption. The lower oil prices also contributed to falling raw-material prices. Anglo American plc. (ADR) (OTCMKTS:AAUKY) indicated that each $10 fall in oil price allows the company to earn an extra $44 million in annual earnings.

Falling oil prices have also led companies and asset managers around the world to restructure their investments by moving away from the energy sector. UK-based Fastnet Oil & Gas PLC. indicated giving back $25 million to its shareholders by moving out of the energy sector and going into medical technology. Asset managers also are pulling out investments from energy companies. Aberdeen Asset Management did the same and took out its investment from Nigeria and reinvested it in Turkey, which is a big oil importer.


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