In early 2016, the crude market went into a nosedive again. Nearly 20% has been wiped off oil prices since the beginning of the year. On January 20, Brent crude was trading at $28 a barrel. Nick Cunningham, an analyst at Oilprice.com, thinks that tumbling oil prices are making an adverse impact both on oil exporting countries and other economies.
A slump in global oil prices is caused by a variety of reasons. Among them are a slowdown in China’s economy, fears about a persistent oil glut, and a possible flood of oil exports from Iran in light of the recent EU and US decision to lift sanctions. Importantly, Iran is expected to immediately add almost half a million barrels per day to crude exports. The country has got 18 tankers fully loaded with 12 mln barrels of crude and 24 mln barrels of condensates ready for shipments. This is likely to add to downward pressure on an oil price that is already plummeting due to oversupply.
Many people tend to think that cheap oil is benign for the global economy as consumers benefit from the bear oil market. However, such a notable drop in oil prices could hamper development of the oil and gas sector, which has to curtail capital investments. Oil has sunk in value by 70% for over 2 years. As a result, oil and gas companies are having troubles with liquidity and slashing capital expenditure that affects other industries.
Besides, tumbling oil prices reduce demand for equipment for the oil and gas industry that in turn influences the financial sector. Most banks have already suffered from insolvency of some previously successful corporations. According to Citygroup, a number of bad loans increased nearly 33% in Q4 2015.
Such developments can make a negative impact on interest rates. Obviously, low energy prices subdue inflation. However, a nosedive in oil prices makes state-run investment funds withdraw their funds from financial markets. Since April to September 2015, the capital outflow equaled nearly $100 bln, 50% of it belongs to Saudi Arabia. Analyst Nick Cunningham notes that a trend reversal in oil prices is unlikely to happen in the near future. So it makes sense to focus on solutions to the above-mentioned problems.
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