CIT: The Drop in Oil Prices – Who Benefits?
CIT released the following, written by Mike Lorusso, Group Head and Managing Director, CIT Corporate Finance, Energy:
“The decline in the price of oil has dominated the news over the last few months. In short, there’s a complex set of factors around the global supply and demand imbalance we’re encountering, which is being further exacerbated by OPEC led by Saudi Arabia taking steps to protect their market share. The consumer benefits from this imbalance through cheaper refined petroleum products such as heating oil and gasoline. Oil is trading at about a 50% reduction of where it’s recently been. But what does it mean for related businesses that support the industry?
Obviously no one knows where the price of oil is going to go but don’t be surprised if prices trend lower over the coming months. As supply and demand begin to come back in balance, which may occur later this year, the price should find a bottom and then modestly increase. One thing we can be assured is that there will be volatility throughout this period.
On the demand side cheaper prices for petroleum and related products globally should benefit consumers and result in an increased consumption of goods. And on the supply side, a reduction in U.S. drilling activity for the higher marginal costs oil wells will gradually reduce supply growth.
In the U.S. market, we’ve seen oil & gas exploration and production companies reduce their budgets and capital spending. First to fall victim has been higher priced drilling activities. These are the higher marginal cost wells that are being drilled in various areas such as the Bakken and Permian basins. It’s a simple equation – when the cost of oil is high you can expand production by drilling the more expensive wells required to produce oil difficult to access. When prices slide, such as they are now, it’s more economical for companies to limit production growth by focusing on lower cost drilling.
To read the full article from CIT, click here.