1.4.1 Oil prices and the financial markets
The collapse in oil prices in the second half of 2014 – with the price of crude oil halving between July 2014 and January 2015 – had a mixed impact on financial markets. Listen to the audio, a clip from BBC Radio 5’s ‘Wake Up To Money’ programme, to find out more.
Download this audio clip.Audio player: ou_futurelearn_mmi_vid_1195.mp3
Transcript
MALE INTERVIEWER
Brenda, this oil price, tumble, hitting American stock markets and having an affect here, as well. What is going on?
BRENDA
Well, I suppose it depends on what your take on things is. As a normal person, lower oil prices should lead to higher disposable incomes and cut business costs, but the stock markets really believe that this slide we're seeing in oil prices - and that's from a peak of $115 per barrel to around $50 per barrel - reflects a slow down in the likes of China, and you're also got your recession in Japan, this looming deflation in the Euro zone, and I suppose a little bit of uncertainty in relation to Greece. The oil price supply factor is involved, in the sense that you've got a huge glot of supply with the USA Shale production adding to supplies, but you also have demand worries, as well, and that is what is helping to send the prices lower.
MALE INTERVIEWER
That's the problem when you have a cartel running things.
BRENDA
Well, OPEC run about 40% of the actual oil supply. Saudi Arabia would be one of the biggest players, there, but they have said they wouldn't even get involved if it went to $20 per barrel, and they've said, before, they can break even at about $5 or $6 per barrel, in terms of production costs. I think, if anything, it's down to the supply coming from the US that's adding to this glot and there seems to be no sign of production cut from there, or indeed, from Russia who seem to be adding to supplies over the last little while.
MALE INTERVIEWER
Where do you see the oil price going?
BRENDA
I don't see it going any lower than the $45 per barrel, to be honest with you. I think we've seen such a massive decline over 50% since the middle of the summer. I think the decline has been exceptional, and I think it's maybe the pricing in of stuff that hasn't actually happened, already, so I think most of the bad news in relation to the Eurozone - it's still a problem, the Eurozone, in terms of what's going on there; in terms of the lack of growth - but I do feel that, perhaps, it's got a little overdone and we could see it come in at bottom over the next few weeks.
MALE INTERVIEWER
Last week, Rod Sharpon, 'Up all night' did a fascinating interview with T. Boone Pickens, and his comments were quite scary in that, if you continue to produce too much oil, and there's no demand, that price is going to carry on falling.
BRENDA
That's exactly it, and there's a question of whether or not the supply is going to be cut, or whether demand is going to pick up. Of course, it remains to be seen whether or not US, obviously they're pretty much self-sufficient now in terms of their oil production and oil use, so from that point of view that takes a major player of demand out of the market. It's whether or not the Eurozone and China can pick up the pace, in terms of demand, and as I said, the stock markets don't, necessarily, believe that, for the time being.
MALE INTERVIEWER
Let's get a bit more on the tumbling price of oil, on the impact on the world's markets, cause right now, big impact in Asia. Let's speak to Rico, he's on his own in Singapore. Hello, Rico.
RICO
Hi Adam. There's really a lot of concern about these current, low prices which could basically squeeze many energy producers and hurt companies that have close links with the energy sector. Everyone is saying this prolonged slide in oil prices should help economic growth, but investors are starting to worry that the depth of this downturn from more than $110 per barrel to $50 per barrel is fuelling a lot of concern that it might be a sign of a weaker global economy.
MALE INTERVIEWER
So, this isn't just a blip, this is starting to turn into a bit of trend?
RICO
It could be a trend according to some of the analysts I spoke to. Oil prices could still fall between $40 to $45 per barrel. It could be like a de facto stimulus package, many say, but it's having another impact on markets. We'll have to wait and see how this will play out, over the next two to three months.
MALE INTERVIEWER
Let's just whizz you, very quickly, through the financial front pages. The FT energy stock leads with: 'Wall Street lowers US oil - oil dips below $50' is their lead.
MALE SPEAKER
Yeah, the Times is, very much, the same theme: 'Markets tumble as oil hits another low', and they've actually got a picture, a chart, if you like, of markets at sea, and two big ships, and it gives all the details there. It sums it up, in one line, what's going on in the markets, and why.
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By helping to reduce the overall rate of price inflation, the fall in the price of oil virtually eliminated the risk of a near-term rise in interest rates. This was ‘good news’ for the financial markets – although not for savers. However, the fall in oil prices was seen by some commentators as indicating a slowdown in economic activity globally – a factor that is not good news for equity markets and certainly not good news for the share prices of oil companies.