Mark Lister: Good outweighs bad in oil price retreat

Brent crude has fallen this week by almost 10 per cent, and prices are now down 34.2 per cent from where they were at the end of June (at over US$110 a barrel). Photo / Thinkstock

Opinion

Falling oil prices have been one of the biggest stories in financial circles over recent weeks. Brent crude has fallen this week by almost 10 per cent, and prices are now down 34.2 per cent from where they were at the end of June (at over US$110 a barrel). Oil prices are now back at levels not seen since September 2010.

The weakness in oil is largely supply related. Non-Opec countries like the US, Brazil and Canada have ramped up supply, while Libyan production in back on stream. However, the weakness also reflects slowing global demand and, in particular, a moderation in demand from China.

With Opec choosing not to cut supply and shore up prices, recent moves have become sharper.

Where the oil price goes from here is difficult to predict, with some forecasters calling a bottom already and others suggesting that prices could fall as low as US$40-50 a barrel. The general consensus seems to be that we could see a little more weakness from here, with prices falling another 5-10 per cent to US$65-70, before we see a rebound and prices settle in a US$70-80 range.

Whether falling oil prices are good or bad depends on your perspective.

The fact that lower demand for oil reflects a mixed economic outlook and slowing growth in some regions is a negative, but I would suggest the positives overwhelmingly outweigh the bad.

On the whole, lower oil prices are good for the global economy. If oil stays at current levels, this would provide a 0.2-0.4 per cent boost to world economic growth in 2015.

However, some counties will benefit while others will suffer. Countries that are net oil importers like Turkey, India, Japan, Germany, China, France, the US and the UK are clear beneficiaries. Conversely, major oil exporters and producers like Venezuela, Russia and Norway will be the losers.

While companies in the business of oil production are clear losers from falling oil prices, those involved in transport, freight, air travel and shipping will benefit because fuel represents a good chunk of their costs.

Some of the obvious local beneficiaries would be Air New Zealand, Mainfreight and Freightways, but the likes of Auckland Airport and Port of Tauranga could also see some flow-on effects. This is because many of their customers will benefit, boosting activity in general.

Lower oil prices are also very good for consumers.

In the United States pump gasoline prices have fallen heavily over the last 12 months.

This no doubt contributed to November consumer confidence hitting the highest levels seen since July 2007, and what consumers save on fuel usually finds its way into the economy through higher spending in other areas.

For New Zealand motorists, petrol prices at the pump have fallen between 10 and 15 per cent since June and are at their lowest levels in more than two years. While this might seem disappointing against the backdrop, we should remember that the NZ dollar has also fallen some 10 per cent over the past 3-4 months, which has partially offset the weaker oil prices.

Maybe buying that V8-powered classic American muscle car isn't such a bad idea after all?

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.