Tumbling Oil Prices

OilThe most interesting event of the previous quarter was the tumble in oil prices that resulted in spectacular falls in associated oil stocks. In mid-December, Santos had fallen 48%, Woodside fell 16%, Origin Energy 30% and Oil Search 20% before all stocks stabilised and found some buying support. Falls of this magnitude suggest that the oil price, which has halved since June, is destined to be less than $60 for the short to medium term due to a supply glut.

As the US dollar rises, the oil price, like most commodities in the last year, will fall. While the peak of pessimism may have passed we are cognisant of the knock on effects of this correction. Interestingly, a fall in fuel costs of this magnitude is a tremendous boost to growth in the US economy and represents a form of economic stimulus that will boost US equities in 2015. It is also bad news for emerging markets particularly Russia being an oil exporter. It is also grim news for oil dependent exporters such as Venezuela, Mexico and Brazil.