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HomeEconomyBenefits of low oil prices diminishing: Moody’s

Benefits of low oil prices diminishing: Moody’s

|By Arabian Post Staff|  The benefits of this prolonged period of very low oil prices are diminishing for some corporate finance sectors or even starting to have a negative impact on others, Moody’s Investors Service said in a report.

The exploration & production, oilfield services, building materials and steel industries continue to bear the immediate effects of low oil prices. The global oversupply, combined with additional exports coming from Iran and OPEC countries producing at capacity, has led to a fundamental shift in the energy industries.

Moody’s price estimates for oil reflect this shift and is in the process of concluding ratings reviews of issuers in these industries owing to the deterioration in credit conditions linked to persistently low oil prices.

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Manufacturing, US surface transportation and unregulated European utilities and power producers are grappling with the effects of low oil prices, according to the report “Non-Financial Corporations — Global: Net Benefits of Prolonged Drop in Oil Prices Diminish or Turn Negative for Some Sectors.

” Electricity prices in Europe have declined in tandem with oil prices, pressuring unregulated European utilities and power producers. Cost cutting among exploration & production and oilfield services is flowing down to US transportation companies that move crude oil, frac sand and drilling supplies. In addition, oil and gas companies are renegotiating their contracts to reduce the prices they pay manufacturers that service or supply the industry.

“While low oil prices continue to have negative effects on the energy and commodities sectors, we are seeing broader shifts in impact on other sectors,” said Mark Gray, Managing Director of Global Corporate Finance at Moody’s. “The benefits of cheaper oil are diminishing for shipping, packaged food and chemicals companies and beginning to have a somewhat negative impact on the manufacturing and US surface transportation sectors.”

Low oil prices continue to provide a strong benefit only to the airline sector, where lower fuel prices have allowed airlines to reduce prices, boosting passenger demand and free cash flow for US airlines in particular.

The auto sector continues to moderately benefit from low fuel prices, with North American automakers selling larger vehicles the predominant beneficiaries. While higher consumer spending will benefit retailers who cater to the lower-income demographic, the impact will be moderate as wage growth remains anemic for this population and unemployment persists.

Mining companies are benefitting more than they did when Moody’s initially analyzed the benefits and risks of low oil prices in January 2015, with operating costs poised to improve 4%-5%. However, the rating agency notes that this improvement falls far short of offsetting low prices for base metals, iron ore and coal tied to the slowdown in Chinese consumption.

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