Will cheaper oil grease the wheels of global growth?
Oil prices are down by one-third since the highs of October. While it may mean cheaper petrol at the pump, what does it mean for your investments?
2 min read
The shrinking cost of ‘black gold’ could help keep prices low, boosting household spending, bolstering the economy and benefitting investors.
Oil prices have fallen 30% in less than two months – plummeting from almost $90 a barrel to under $60, its lowest level in over a year.
This could very well provide a small but important boost for investors as it means lower costs for companies, improving their profits.
Coutts Investment Strategist Lilian Chovin says, “The cost of oil contributes to the price of fuel used by factories and it’s a key expense in transportation as companies distribute their products.
“If a product becomes cheaper to produce then a company’s margins improve and this makes a difference to its bottom line. Share prices for more profitable companies tend to rise, allowing for potentially higher dividends for investors.”
Lower oil prices can also put more money into people’s pockets, boosting consumer spending which is also good for companies. It can lead to lower household energy bills and lower prices at the pumps – as shown by Asda, Morrisons and Sainsbury’s reducing what they charge at their petrol stations.
More efficient oil companies avoid the worst
On the flip side, a lower oil price can create challenges for the energy sector, which makes up 17% of the FTSE 100.
Lower prices tend to mean lower margins for oil companies, and the price per barrel can even fall to levels where it’s no longer profitable to extract and process.
But this is less of a problem than it was in the past. Many oil companies have become more efficient at extracting and processing oil and have diversified their businesses to rely less on oil prices.
This has helped make them less vulnerable to weaker prices and helped shield us from any negative effects of the oil price plunge on our investments.
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