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Oil price plunge: Who’s going to win and who’s going to lose?

17 November 2014

JPM’s Alex Dryden tells FE Trustnet where the plummeting price of oil will help and where it will hurt investors’ returns and reveals the key date they should have in their diaries.

By Daniel Lanyon,

Reporter, FE Trustnet

Amid all of the confusion this year as equities moved sideways in the UK, down in the eurozone and grinded slightly higher in the US nobody foresaw that oil could lose more than a quarter of its value in a matter of months.

Market concern over the heightened geo-political tension in the Middle East and Russia, two important oil producing regions, suggested an oil price spike instead of a fall.

However a hike in supply from the OPEC and the US shale gas boom has sent prices below $80 per barrel for the first time in more than four years.

According to FE Analytics, Brent crude – the global benchmark for oil prices – has fallen 25.4 per cent in 2014 while the FTSE World index has gained 10.84 per cent.

Performance of index in 2014

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Source: FE Analytics

JP Morgan global market strategist Alex Dryden says oil prices are driven by an intricate blend of global demand mixed with changes in geo-political risk, but current trends will be a boon to the world economy.

“Lower petrol prices means that the world’s fuel costs have dropped by $1.8bn a day, which is a big benefit to global growth. Estimates of growth suggest that a $10 fall in oil prices means that oil-importing economies grow by an additional 0.5 per cent a year at the expense of oil-exporting economies,” he said.

“The global economy is continuing to pick up speed and is yet to be firing on all engines. With the exception of the US and UK economies, many economies are still struggling with sluggish growth prospects and, in the case of Europe, high and sticky unemployment.”

He says with a fall in prices a number of countries’ equity markets could take an extra lift.

“Low oil prices can help boost profit margins in both the US and Europe and be a shot in the arm for a number of developed and developing economies.”

However, as a recent article suggested the fall in prices could hurt investors in one of the most popular sectors, UK Equity Income due their almost ubiquitous holding of oil companies.

This could also be damaging to investors in developed market trackers or exchange traded funds, which also have a high weighting to oil majors especially the US and UK.

For example, oil and gas companies make up 13.4 per cent of the FTSE All Share and have been amongst the worst performers of late.

Over the past six months, the FTSE All Share index is down 1.55 per cent while the FTSE 350 Oil & Gas Producers index has lost 11.55 per cent.


Performance of indices in 2014

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Source: FE Analytics

Dryden said: “There is an argument to be had that the fall in oil prices is the first canary to stop singing in the coalmine, signaling that global demand is weaker than first thought and we could be in for a global slowdown.”

Oil has only fell by a greater margin during the worst period of the financial crisis. Between July 2008 and April 2009 the oil price plunged more than 65 per cent, although from a higher base than this year’s falls.

Performance of indices 2008-2009

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Source: FE Analytics

However, Dryden says that unlike this period when broad economic demand rapidly weakened, today’s low oil prices are a result of over-supply of oil from OPEC member states such as Libya, Iraq and Saudi Arabia and not the first warning of an approaching slowdown.

He says the immediate big winners of falling oil prices will be consumers in the US and Europe.

“Falling petrol prices are effectively a tax break for the hard-pushed average consumer who has yet to see real wage growth in this economic recovery. Lower oil prices puts more money in their back pocket which is great considering the Christmas season is right around the corner.”

In emerging markets energy-importers such as Turkey and India will also get a boost from lower oil prices but oil-exporting countries in emerging markets will take a hit, he says.


“Should lower oil prices persist then emerging economies such as Venezuela or Russia may be forced to adjust their fiscal balances by cutting subsidies and social benefit programmes which may trigger political and economic instability.”

Dryden says a key date for investors’ diaries is the 27 November, when OPEC meets in Vienna, which could prompt further falls.

“It is being touted as the most important meeting in over a decade for the oil cartel. Judging from recent comments made by OPEC member states it seems there is concern over the current price of oil but there are no plans to adjust production just yet.”

“A lack of an agreement or a disorderly decline in OPEC production coupled with sluggish growth could see oil prices continue their slide with some forecasts suggesting $70 per barrel by 1Q15 may be a possibility.”


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.