Oil prices drop: Winners & losers 

Oil-Price-Fell

In recent times, oil prices may have risen in one or two trading sessions. But, those are dead cat bounces! Lest we forget, oil has now lost nearly a third of its value amid volatility since early October.

For instance, the West Texas Intermediate (WTI) crude settled at $51.56 a barrel on the New York Mercantile Exchange on Nov 27 from a high of $76 a barrel reached on Oct 3. Some market pundits now caution that oil prices might be echoing the pattern of a few years ago, when oil prices had tanked more than half, from $90 a barrel in November 2014 to $41 in January 2016.

But, what led to the steep decline? Doubts about the Organization of Petroleum Exporting Countries’ (OPEC) resolve to curb production amid supply overhang and demand uncertainty have come together to push oil prices down.

OPEC, led by Saudi Arabia, recently showed interest in trimming its output in order to stabilize prices. However, Saudi Arabia ramped up production to all-time high in November, pumping 11.1 million to 11.3 million barrels per day (bpd) during the month. Confirmation that U.S. production is booming, especially doubling in shale production since 2012, has also led to the latest oil price retreat.

The supply-demand disparity, in fact, started to increase after the Trump administration decided to relax sanctions on the purchase of Iranian oil by granting waivers to eight buyers of Tehran’s crude. This drove oil prices lower into what would turn into an unprecedented decline.

President Trump, by the way, has been rooting for lower oil prices and has warned Saudi Arabia to avoid taking any action to check the downtrend. In return, Trump won’t be taking any action against Saudi Arabia for the assassination of journalist Jamal Khashoggi.

Meanwhile, apart from oversupply concerns, weakening demand affected the oil market. Apprehensions about a slowdown in the China economy owing to the ongoing Sino-U.S. trade disputes increased expectations of a fall in oil demand. After all, China is the world’s largest importer of oil and thus the largest driver of crude oil prices.

Moreover, the recent strength in the U.S. dollar weighed on dollar-denominated prices of oil, added Phil Flynn, senior market analyst at Price Futures Group. Let us now take a look at the potential winners and losers as oil prices fall at a steady clip:

Falling Oil Prices Put Pressure on E&P Companies

Exploration and Production (E&P) companies have always been perturbed by the continuous inflow of cash. After all, such cash inflows are required to finance their investment programs. However, such concerns were in the backburner after crude price rose this year.

At the end of the third quarter, U.S. E&P companies were able to cover capital spending from operating cash flows. Most of the U.S. E&P bigwigs, in fact, on average posted cash flows that were higher than their capital spending in the third quarter for the first time since 2011, with Exxon Mobil Corporation XOM and Chevron Corporation CVX, the country’s largest oil groups registering healthy profits from U.S. operations.

But, the collapse in oil prices over the past two months has raised fresh concerns about the possibility of further infusions of cash, something that doesn’t bode well for E&P companies. Lest we forget, in the third quarter, WTI crude price averaged $73 a barrel, and now it’s trading just above $50 a barrel.

Source: Yahoo Finance

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