November 2014 Advisor Thought Leadership: Petroleum Puzzlements

by on Dec 08, 2014

oil_pricesOil was once again a hot topic amongst investors and advisors alike as prices fell to the lowest point in years. There are, of course, many underlying factors that drive this market momentum, as well as myriad benefits, drawbacks and opportunities for various actors across the globe. This month we found five pieces that pay particular attention to the topic:


1. AllianceBernstein: The Causes and Implications of the Sharp Fall in Oil Prices – Considers recent price fluctuations as a function of global economic health, citing the notion that slowing economic growth generally (but not always) reduces demand. However, the effects of this slowdown are always felt unevenly throughout the global market. For example, American have benefited greatly from much cheaper gas, and the global volatility in oil production highlights the growing value of U.S. natural gas resources.




2. Allianz: How the Market Miscalculates the Price of Oil – Highlights how energy production trends in the U.S. upset the balance of the global oil industry. The authors note, for example, that Texas now produces more oil than all of Iraq and that the increased exploitation of shale oil only adds to the American production advantage. With oil prices now at headline-grabbing lows, however, the authors also note that the current global level of oil production is only sustainable if the world adds “another Russia or Saudi Arabia” to its total output every two years.



3. Fidelity: ISIS and Oil Prices – Describes how ongoing conflict stemming from Islamic State actions threatens the integrity of Iraq’s oil industry, which is currently second among all OPEC nations. The disruption comes at a time when worldwide oil production is only just above real demand (barring this current demand hiccup), meaning that the world energy market could be seriously compromised if Iraq were to stop production altogether. The flipside of this danger, however, is that North American producers, driven instead by a boom in natural gas production, now have an opportunity to stand out and reap healthy profits.



4. J.P. Morgan: What is Behind the Recent Slump in Oil Prices? – Takes a more macroeconomic approach to the topic, noting a distinct decline in global demand for oil that undercuts global supply, causing oil prices to fall precipitously. Slowing economic activity in Europe and Japan, for example, contrasts with near record levels of oil production in Libya, Saudi Arabia, and the United States. The resulting price fluctuations, of course, have had a major impact on energy markets worldwide. However, prime investment opportunities in this area may be fleeting because these sorts of imbalances rarely last for very long.



5. BlackRock: Lower Oil Prices Produce Winners and Losers – Frames the recent decline in oil prices as a side effect the U.S. dollar’s appreciation. As a result of both developments, American consumers and businesses are prospering, but other oil-producing nations, such as Russia and Venezuela, aren’t seeing the same benefits. Oil importers, however, can also take advantage of lower oil prices to more effectively meet their own energy needs and drive domestic investment opportunities.