Oil Price Crash Worse Than 1986

Morgan Stanley has revised it’s rather pessimistic view about oil prices in 2015. Previously analysts had warned the down turn could even rival the iconic price crash of 1986, but definitely no worse. It now says it will be much worse.
Until recently, confidence appeared strong for a recovery in oil prices and oil company stocks. That confidence was based on four premises, they said, and only three have proven true.

  1. Demand for oil will rise
  2. Spending on new oil will fall
  3. Stock prices will remain low
  4. Oil supply will drop

In theory the crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips. In reality despite a softening Chinese economy, global demand has surged by about 1.6 million barrels a day over last year’s average.

In theory lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline. Since October the number of rigs actively drilling for new oil around the world has declined around 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone, listed oil companies have cut about $129 billion in capital expenditures.

In theory while oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound. This has proved to be true with stocks of oil majors trading near 35-year lows.
In theory, with strong demand for oil and less money for drilling and exploration, the global oil glut should diminish, but the opposite has happened. While US production has levelled off since June, OPEC has taken up the role of market spoiler.

Source: Bloomberg   Licence: Creative Commons
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