Crude oil has hit just $68 per barrel, the lowest level in five years. The most recent rapid decline was put in motion by OPEC’s announcement last Thursday that it will not cut production to support prices, for the time being at least.
Large movements in the price of oil present investors with a difficult task in deciding how best to position themselves because it creates both big winners and losers.
On the plus side falling oil prices typically, although not always, filter through to cheaper petrol and other fuels which helps drive economic activity. Manufacturers’ costs of production fall and consumers have more money in their pockets as filling up the car costs less.
On the downside the effects are more uncertain and can be more significant and wider ranging. Commodities markets have taken a hammering today as investors have taken the view that a floor is some way off still and bailed out.
However it is the deeper implications of a sustained fall in oil prices that are making investors nervous. Geopolitical risk is being ratcheted up because of the dependence some parts of the world have on oil exports. Russia is chief among these and some believe the economic pain being brought to Russia by the oil price fall and western sanction raises the chances of Vladimir Putin escalating his aggressive foreign policy.
Certain Western-friendly regimes in the Middle East and North Africa are also being put under strain, including Saudi Arabia. Any weakness in the hold governments in these countries have over power would embolden Islamic State and other militant groups.
Sandra Heidmann, emerging markets advisory at SEB also sees the falling price as a threat to other oil dependent emerging markets like Venezuela, due to their currencies.
“Oil prices are continuing to spiral downwards and are currently trading around 68.30 per barrel after OPEC resisted calls from members to reduce its production target last week at a meeting in Vienna,” she said. “While Russia is actually making more money on oil as the currency is weakening, Venezuela, with their fixed, multiple-tier exchange rate system that vastly undervalues the USD, is hurting tremendously.
“Oil accounts for over 95% of Venezuelan government revenues and foreign currency reserves have been largely depleted over the last 12 months. Furthermore, the country is suffering from hyperinflation (above 60%) and basic goods like cooking oil, rice, coffee, sugar and toilet paper has become scarce.
Reports have also emerged that the Bank of England is going to examine the threat posed to economic stability by fossil fuel companies in what seems a very timely move.