Market commentary: Déjà vu as oil prices fail to recover

Here we go again – global stocks fell sharply amid worries about global demand and renewed pressure brought abought by sliding oil prices and rising inventories. The prolonged retreat of oil has been unsurprisingly wreaked havoc for energy companies, as reflected by the terrible results posted by BP and Exxon Mobil on Tuesday. No respite this morning as major Asian indices again tanked, with the Nikkei down in excess of 3%

BP announced a record loss of $6.5 billion for 2015, propelling the stock lower by as much as 8%. Almost half of the loss came in the fourth quarter, when oil prices began plummeting. The British oil and gas company, which is still grappling with about $55 billion of costs from the notorious oil spill in the Gulf of Mexico in 2010, said it would cut 7,000 jobs by the end of 2017, or nearly 9 percent of its workforce.

BHP Billiton saw its S&P rating cut to A and its outlook set to negative, sending shares down by almost 7%. More downgrades are on the cards within the month, particularly if the company sticks with its progressive dividend policy which ensures its US dollar shareholder payouts do not fall. According to the rating agency, and echoing a call also made by Credit Suisse last December, this is hurting profitability. BHP is due to report interim results in the coming weeks.

Exxon Mobil, the world’s largest player in the energy space, announced estimated 2015 earnings of $16.2 billion. That’s down by more than half over the previous year. The results would have been worse were it not for its refining and chemical businesses which have generated almost $1.35 billion in revenue, up from less than $500 million in 2014.

Tech side note – Alphabet, Google’s parent company overtook Apple as the world’s most valuable company after its latest earnings report. Ad driven revenue helped the company top analyst expectations by 17%, with earnings per share also 7% higher than expected at $8.67. Remember Google’s controversial tax deal with the UK? – Google’s effective tax rate for the fourth quarter was 5%...

Low oil prices – Good or bad?

Dramatic changes in the price of oil have traditionally forerun most economic crises. However, these dramatic changes were usually one way – up. To quote an oft-used phrase, this time it’s different. But is it? There is growing concern in some sectors that low energy prices can push the global economy into a tailspin.

The idea is counter-intuitive, but the world’s economy relies far more today on emerging countries than when we last experienced very low oil. Those emerging countries host a growing share of the world’s consumers and investors who are getting hammered by the fall in oil and commodities prices in general. Apple, for example, blamed weaker sales last quarter on lower economic growth in some oil-rich countries.

With the exception of China and India, most big emerging countries are oil and commodities rich, and many of them are now facing very difficult circumstances and have to cut investment spending significantly, cutting dozens of capital-intensive projects – like drilling wells – which in turn means lower demand for machinery. Wood Mackenzie, an industry consultant, estimates that at least $380 billion has been put on hold. IHS Inc. puts it at as much as $1.5 trillion. Whatever the amount, the IMF says the impact on investment in oil and gas new projects is “subtracting from global aggregate demand”.

Not everyone is worried though – in a paper released in January the Dallas Fed said that a drop in oil prices brought about by rising supply should boost global growth by up to 0.4%. This would mainly be due to an increase in spending by oil-importing countries, which would exceed the decline in expenditure by oil exporters.

According to BlackRock CEO Laurence Fink, the market is focusing on the short-term adjustments and ignoring the reality that “4 billion human beings are going to have cheaper energy, cheaper heating, they’re going to have more disposable income”. Analysts at Bank of America Merrill Lynch have estimated this increase at around $3 trillion (yes, trillion), “setting the stage for one of the largest transfers of wealth in human history”.

Will consumers behave as they should? That is the question. It is somewhat early to make an assessment at this point in time. Unless oil prices are forecast to stay low for a tangibly long period of time the boost from lower oil will likely be viewed as temporary. What’s worse, consumers who feel their income has risen permanently may feel compelled to save or repay their debt, fearing that a new crisis may have even more severe financial implications for debtholders than the one we have just, barely, left behind.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.