Collateral damage

Lower oil prices are deemed to be good for the wider global economy, even if economists argue about how many $/bl less on fuel costs equates to one percentage point of GDP growth. Yet the casualty list of those wounded by tumbling values is populated not just by oil companies and oil exporting countries, but also by innocent bystanders.

The price of crude may have been on a tear for the last few days, but the current earnings season shows the impact of last year’s sharp fall is being felt far and wide.

The oil services sector is, of course, taking a bit of a beating. Houston-based National Oilwell Varco (NOV), for example, has for a good few years had a booming market on its doorstep for its drill bits and associated well ephemera. But things have changed, and NOV now says its customers are sharply reducing their oilfield activity and spending.

Moving crude away from the oil wells has meant good times for pipe makers and rail companies in recent years. But when the wind changes, companies need to adjust fast. Steel tube maker Vallourec plans to write down the value of its assets by more than €1bn as oil and gas companies cut back on upstream capex.

Elsewhere, United Steel is part idling a plant in Texas and another in Alabama, citing the cyclical nature of energy markets.

Further downstream, falling crude prices are stalling major pieces of energy infrastructure, like Sasol’s final investment decision on an $11bn-14bn gas-to-liquids plant on the Louisiana coast.

UK-based food processor and retailer Associated British Foods is writing down its investment in UK bioethanol producer Vivergo, as European ethanol prices are pushed to record lows by falling crude.

Jacobs Engineering Group, which works both upstream and downstream, has said the uncertainty in the oil industry has led it to be cautious in its outlook for this year.

Even companies that should benefit from lower oil prices were caught out by the speed of price adjustment at the latter end of 2014. Ryanair, which should be revelling in lower jet fuel costs, locked in large amounts of its fuel purchases this year and next at what must have looked like a good deal at the time, but which turned out to be at higher prices than jet fuel sells for today.

Even entire nations are exposed. Standard & Poor’s has downgraded its rating on the Russian economy to junk grade, saying falling oil and gas prices mean the country is “experiencing a severe terms-of-trade shock”.

These are all reactions to events in the final months of 2014 which, as Barclays pointed out in a note on 22 January, is still within the first six months of the oil price decline. “A cursory look at five similar episodes of oil price declines in the past 30 years indicates that global growth did pick up in the aftermath with a two- to three-quarters lag,” Barclays said, suggesting positive effects in activity indicators should begin to come through in the coming months.

And this corporate earnings season may already be showing the worst of it, if lower oil prices are already feeding through into demand stimulation. But if expectations of an immediate price recovery mean that deep cuts in production are shelved, this could prolong the oversupply and price distress, Citi says.

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