Following a brief rally at the start of February, oil prices once again plunged below $50 a barrel after the government reported a new record high for crude stockpiles in the United States. According to the Energy Information Administration, US crude stockpiles rose by 4.9 million barrels to 417.9 million barrels in the week ended February 6. The amount of oil stored by traders and refiners were slightly bigger than expected and stands at the highest level in about 80 years.
Domestic production also rose by 49,000 barrels a day to 9.2 million barrels a day in the week. Gasoline stockpiles rose by 2 million barrels—more than the 200,000 barrel gain analysts expected.
In theory, the big fall in the price of oil since the summer should boost economic costs as it cuts costs for both businesses and consumers. But according to the global macro outlook report released by ratings agency Moody’s, the predicted growth among G20 countries is less than three percent—unchanged from last year’s rate and Moody’s earlier 2015 forecast.
The positive effects of falling oil prices are largely offset by weak Eurozone data. “In the euro area, the fall in oil prices takes place in an unfavorable economic climate, with high unemployment, low or negative inflation, and resurgent political uncertainty in some countries,” said Marie Diron, who wrote the report.
Russia, in particular, is suffering from industry chaos due to the combination of low oil prices and international economic sanctions. According to a new report by the International Energy Agency, oil is expected to fall to below 10.5 million barrels over the next five years. This is in sharp contrast to an earlier forecast that Russia would exceed 11 million barrels a day by 2019.
The lack of access to the international market due to the sanctions imposed upon the country means that firms are unable to plug the financing gap caused by cheaper oil. Many of Russia’s major commodity producers have been forced to cancel or postpone exploration projects aimed at finding new supply sources. Meanwhile, foreign investors and partners are holding off business in Russia in order to play it safe.
But even without sanctions, the country could still face serious economic challenges because of a prolonged period of under investment. The best way to take advantage of the low share prices of Russian companies is to invest in companies that benefit from the falling ruble due to the low maintenance costs in Russia and high revenue from outside the country.
Nickel mining company Amur Minerals Corporation (OTC: AMMCF) is an excellent example, as the current Russian crisis only has minimal impact on the business. According to Amur Minerals CEO Robin Young, “We’re a debt-free company. All our financing has basically come through the UK.” Mining giant Norilsk Nickel also has attractive fundamentals, as the company pays half its earnings before interest, taxes, amortization, and depreciation.
Win Some, Lose Some
Both the US and India are top gainers for the continuing low oil prices, with Moody’s increasing its forecast for US growth in 2015 to 3.2 percent from three percent.
However, too much of a good thing can have negative repercussions, as the falling oil prices could also mean that the global economy is starting to fail. Hydraulic fracturing or “fracking” technology has enabled North America to access previously inaccessible energy reserves in order to develop significant new oil supplies. Because of this, US and Canada production has risen over 45 and 25 percent in the last four years, respectively. Total world demand only grew about four percent since 2010, meaning North American production has grown around 38 percent faster than global demand. This could mean that the price of oil could take quite some time to recover, hence damaging economies all over the world in the long run, including the US.
“Crude suppliers from OPEC members like Venezuela and Nigeria will eventually plunge because half of the world’s oil production at current prices below $50 a barrel is not sustainable,” said Ed Morse, global head of commodity research at Citi.
Worse, there is still no bottom point in sight. Morse said, “The oil market should bottom sometime between the end of Q1 and the beginning of Q2 at a significantly lower price level in the $40 range, after which markets should start to balance.” He even predicted prices as low as $20 per barrel.
Seasoned industry execs predict a U-shaped oil rebound instead of a rapid, V-shaped one—a conclusion largely drawn out from history books. “There are four times when prices came down over the last 30 years. Only once was there a rapid jump back,” said BP CEO Robert Dudley. Hence, investors should expect a lot of volatility in oil and energy stocks as it starts to recover, though the question of when it would happen is still up for debate.