Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: Will the Lower Oil Prices Spur a Surge in Global Oil Demand?
October 27, 2014
To state the painfully obvious, lower oil prices are undesirable for the vast majority of companies in the energy complex (and our careers). Thus, when lowering our 2015 and long-term oil price forecast last Monday, we published a multitude of estimate cuts and target price reductions. In response to our cuts, many investors have asked: 1) who wins in a lower oil price world; and 2) won't lower oil prices spur global oil demand? In this Stat, we take a broader look at both the winners and losers from a lower oil price environment and how it affects the economies of entire countries - oil exporters as well as importers. Additionally, we will try to clear up a few misconceptions from those believing that surging oil demand growth from lower oil prices will allow the price to quickly self-correct. Yes, lower oil prices can spur a modest positive global demand response, but we think it will be muted because: 1) oil is typically price-inelastic; 2) oil price subsidies around the world mask price movements; 3) high oil taxes in some consuming countries minimize the percentage change in fuel prices to consumers; and 4) a sizable portion of the world's recent growth in oil demand was coming from the oil price-dependent Middle East. The bottom line is that, for the global oil market, we would anticipate no more than 20-30 basis points (bp) (or ~200,000 bpd) of oil demand uplift based on the lower oil prices.
This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.
There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
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