Oil prices are on a slippery slope. Which countries, companies and financial assets will be the biggest winners—and which will be on the losers' board?

We debated this and more in the wake of the recent 50% plunge in crude oil prices. The resulting 16-page publication includes:

A deep dive into the state of supply and demand, including a spotlight on U.S. shale drillers—the new marginal producers of the global oil market.
The impact of cheaper oil on monetary policy and economies, as well as the biggest winners and losers among developed and emerging nations.
Our view on the prospects for oil prices—and the risks and opportunities in high yield, investment grade and equity markets.

The map below outlines the economic impact of a $50 decline in the oil price on individual countries. Gains (green) are dispersed across developed nations and most of the Asia-Pacific region. Losses (purple) are concentrated in oil-producing nations in the Middle East, Africa and elsewhere.

Chart: Oil Spillover

Highlights:

  • The crude crash is dramatic—but not unprecedented. Falls of similar size in the past stimulated consumer spending, helping to reinvigorate global economic growth.
  • We think crude prices are bottoming and see them modestly higher next year. It would only take a moderate shift in demand to restore balance to the oil market.
  • Soft demand and a strong U.S. dollar have helped lower oil prices, but ample supply due to new technologies such as hydraulic fracking is the root cause of the decline.
  • Key producer Saudi Arabia looks determined to keep pumping oil under new leadership. Overall U.S. supply is set to rise further this year due to a backlog of producing wells and price hedges sheltering producers from the downturn.
  • Declining capital spending and fewer drilling rigs in operation point to a slowdown in production growth in the second half of 2015 and beyond.
  • Cheap energy is a game changer for monetary policy in oil-importing nations, especially in emerging market (EM) economies. It reduces inflation, giving some central banks room to ease—and others leeway to raise rates more gently.
  • Low oil prices add to growing developed world divergence. The Eurozone and Japan are set to keep rates near zero. The U.S. Federal Reserve, by contrast, is likely to look beyond oil's disinflationary effect and start hiking rates in mid-2015.
  • Global consumers, oil importers such as India and Japan, and the transport and retailing industries will benefit from cheaper oil.
  • Oil-exporting nations and companies with limited cash and poor access to debt markets (think Venezuela or overleveraged U.S. shale plays) look to be the biggest losers.
  • The oil price slump is bludgeoning U.S. high yield energy issuers. Many have been outspending their cash flow and now face a crunch as financing dries up. The longer lower prices hold, the greater the financial stress.
  • Valuations of global energy stocks have fallen, but selectivity is important. We favor the "super majors" because of their strong balance sheets, high dividends and integrated business models. We would avoid most oil services firms for now.

 

Jean Boivin, Poppy Allonby, Ewen Cameron Watt
Jean Boivin, Poppy Allonby, Ewen Cameron Watt

Robert Wartell, Gerardo Rodriguez
Robert Wartell, Gerardo Rodriguez

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Life After Zero

Mid-Year Outlook 2014

BlackRock Investment Institute: 2014 Mid-Year Outlook

Risk assets are grinding higher and volatility is extraordinarily low. Our outlook outlines what is in store for the rest of the year–and what life after zero (rates) may look like.