In the lead up to the G20 summit, Russian military ships were coasting through international waters.
The official response from the Russian embassy in Canberra was these ships were off to artic waters for exploration purposes.
That didn’t stop many mainstream Australia papers declaring it a show of military strength.
It did look as if Russia was flexing the proverbial military muscles.
But those ships overshadowed a bigger story.
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Russia is facing a recession.
Lower oil prices are starting to hurt the Russian economy.
Russia’s finance minister Anton Siluanov confirmed this during the week. Siluanov told Bloomberg that ‘recession is inevitable in 2015 if the situation worsens. If the oil price declines to $60 per barrel, the economy will have negative growth.’
Furthermore, Bloomberg noted that ‘Brent, the grade traders look at for pricing Russia’s main export blend Urals, has fallen 28 percent this year.’
Bloombergestimates that oil and gas revenue for the former Soviet Union account for half of the nation’s budget.
This is on top of economic sanctions imposed by the US and the European Union after Russia’s alleged role in the Ukrainian calamity.
Optimistically, Siluanov reckons an oil price dip to US$70, or even US$60 per barrel ‘…won’t be a long term trend. Most likely the price will be within a range of $80 per barrel to $90 per barrel next year.’
Some analysts reckon geopolitical issues in the Middle East will soon send the oil price soaring. Our own Diggers & Drillers resource analyst Jason Stevenson reckons oil will head back up to US$150 per barrel on geopolitical conflict. However, he sees crude oil falling to US$58 dollars per barrel if geopolitical risk doesn’t dramatically escalate in the short term. Jason talked about the fundamental implications for crude oil and geopolitical risk in Diggers and Drillers last week.
Despite the military tensions in the Middle East, the crude price is still falling.
The price of Brent crude has slid almost a third this year and currently resting at US$77 per barrel.
Kris Sayce sees prices staying where they are, if not falling even more.
Almost two months ago, Kris explained to Money Morning readers why the oil price could tumble further from here.
‘My personal view is that the oil price is more likely to fall as other countries follow the US lead on shale exploration.
‘And, like all other technologies, the more widespread it becomes, the more it encourages competition, and that will cause the cost of shale oil production to fall.
‘Add to that further mammoth oil finds such as that by the Russians recently, and potential monster resources in Southeast Asia’s coastal waters, and you could see a huge glut in oil over the next 10 years.’
New tech and massive oil finds aside, there’s a benefit to lower oil prices the mainstream ignores.
You see, at first, the lower oil prices dragged down massive oil stocks like Exxon Mobil Corporation [NYSE:XOM] and Chevron Corporation [NYSE:CVX]. Initially, both the mainstream analysts and investors were only worried about the impact lower crude prices would have on the companies’ profitability.
This is an odd position to take when you consider lower energy prices mean users can afford to consume more.
The Brent crude price began falling from US$110 per barrel in July this year. From that point until the middle of October, the Exxon share price and the Chevron share price fell 12% and 13% respectively.
In other words, the Brent crude price drop led to a sell off in the stocks of both these oil giants.
But something changed in the middle of October .
The share prices of both the oil companies began to rise again. Since mid-October, Chevron shares are 4.8% higher from the low point. And Exxon stocks are up 4.1%.
Kris explained exclusively to Tactical Wealth subscribers why nose-diving oil prices are a good thing. In fact, Kris thinks investors have taken a ‘glass half full approach’.
Kris’s reckons investors have realised company balance sheets won’t suffer as much as they first thought. If anything, lower energy prices will give consumers a spending boost.
‘DO NOT underestimate the psychological impact of lower oil and petrol prices. Petrol prices are the ultimate confidence booster…or destroyer. There are few other businesses that advertise their product prices in the same way as petrol stations.
‘Petrol prices are magnetic. It’s impossible to drive past a petrol station — even if you have a full tank — without glancing at the price on the five-metre high price boards. When the price is low, you instantly feel good. When the price is high, you instantly dread the next time you have to fill up.
‘The oil price is a big deal. It’s a key leading indicator for where the market could go next. Even if the oil price doesn’t fall any further, it has already started to have a positive psychological impact on consumers.
‘To roll out another cliché, traders now seem to be looking at the geopolitical impact on the oil market as a ‘glass half full’ situation. In other words, that maybe things aren’t so bad after all.’
If the falling oil price plays out the way Kris expects, it’ll have a compounding impact.
Inevitability, cheaper energy costs will lead to more consumer and business spending. That will lead to higher stock prices.
And higher stock prices will keep this bull market going.
Regards,
Shae Smith +
Editor, Money Weekend
The post Falling Oil Prices: Crippling Russia But Good for Stocks appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
