RahmanSL
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Oil!....the one commodity I am familiar with for most of my career life….not directly exploring, drilling, and extracting that black gold, but in the support sector…i.e. structural & pipeline construction, back-up facilities & services.
In the last hour or so before last Friday market closing, I watch as WTI took another tumble down to the 46.68 level and I drew a red line to mark that level. The black stuff has fallen by 22% in June 2015 alone! I overheard in Bloomberg that many companies require USD80 p/b to stay profitable.
As I drew that line, I picture oil producers personnel…in fact, the entire oil & gas industry personnel….doing the same thing, but filled with much more anxiety & worries than I am who was not even trading that commodity.
The Oil & Gas sector is a major GDP contributor to most country…including the US…..producing that black stuff. Since it is priced in USD, and with ridiculously strong USD, countries whose currency has depreciated sharply against the USD does not benefit from falling & low oil prices. In many cases, due to exchange rate to the USD, these countries actually pay more for oil.
Let’s get down to my weekend rumbling on why I posted this in the first place!
When “oil producers” are mentioned, most people would automatically think of “oil producing countries & companies” doing the exploration, extraction and….yes…production of oil and marketing that to the world consumers. The contractors, sub-contractors, and service & logistic companies are hardly mentioned.
As oil tumbled, oil producing countries GDP will be affected by lesser revenue collections, oil producing company’s profit margins are slashed resulting in companies taking cost savings measures like reducing workforces, defer or even cancelling project contracts, etc. These cost savings then cascade down to the oil & gas contractors, sub-contractors, and service & logistic companies who in turn will take similar cost cutting measures.
As a result of all these cost saving measures, other sectors will also be affected…..e.g. Rig/Tug/Supply boat/Crew & Utility Boat/Barge supply & rental companies, shipyards & dry docks, machinery/equipment sales & rentals, hotel, air travel, transport, restaurants, etc, etc all the way down to the Mum & Pop shop as laid-off workers mean less money to spend.
Service & logistics companies broadly categorized companies providing land & marine/hydrographic survey, Diving equipment & divers, None Destructive Testing, rental & services of oil tools & equipment/machinery, chemical/material suppliers, land & sea transport & lifting equipment, etc, etc.
As can be seen, the effect of low oil price have a cascading effect all the way down to the man on the street and it’s most certainly not only about revenue to the oil producing country and company.
Most worrisome to me is that the United States of America is the world’s second biggest oil producer just a shade below the Saudis. Somehow, the US GDP dependency on the oil & gas sector is either overlooked largely ignored, under prioritized or kept low keyed by Washington. If the oil & gas sector collapsed, it will have devastating effect on the debt ridden US economy as well as to the rest of oil revenue dependent countries.
With such costly USD, US exports are already taking heavy hits and, with expected large jobs retrenchments in the oil & gas related sectors, local economy will be hit hard too since, traditionally, oil & gas workers are better paid than those in the government & private sector.
I am not sure whether grandma Yellen and the FED realize the full implication of what stronger USD and weak oil prices will have on the US economy, but my bet is they do and so will not hastily raise interest rates indiscriminately and irresponsibly.
That’s it! That’s my rumble for this week!...Have a fantastic weekend, relaxed, fresh and ready to tackle the forex market on Monday.
In the last hour or so before last Friday market closing, I watch as WTI took another tumble down to the 46.68 level and I drew a red line to mark that level. The black stuff has fallen by 22% in June 2015 alone! I overheard in Bloomberg that many companies require USD80 p/b to stay profitable.
As I drew that line, I picture oil producers personnel…in fact, the entire oil & gas industry personnel….doing the same thing, but filled with much more anxiety & worries than I am who was not even trading that commodity.
The Oil & Gas sector is a major GDP contributor to most country…including the US…..producing that black stuff. Since it is priced in USD, and with ridiculously strong USD, countries whose currency has depreciated sharply against the USD does not benefit from falling & low oil prices. In many cases, due to exchange rate to the USD, these countries actually pay more for oil.
Let’s get down to my weekend rumbling on why I posted this in the first place!
When “oil producers” are mentioned, most people would automatically think of “oil producing countries & companies” doing the exploration, extraction and….yes…production of oil and marketing that to the world consumers. The contractors, sub-contractors, and service & logistic companies are hardly mentioned.
As oil tumbled, oil producing countries GDP will be affected by lesser revenue collections, oil producing company’s profit margins are slashed resulting in companies taking cost savings measures like reducing workforces, defer or even cancelling project contracts, etc. These cost savings then cascade down to the oil & gas contractors, sub-contractors, and service & logistic companies who in turn will take similar cost cutting measures.
As a result of all these cost saving measures, other sectors will also be affected…..e.g. Rig/Tug/Supply boat/Crew & Utility Boat/Barge supply & rental companies, shipyards & dry docks, machinery/equipment sales & rentals, hotel, air travel, transport, restaurants, etc, etc all the way down to the Mum & Pop shop as laid-off workers mean less money to spend.
Service & logistics companies broadly categorized companies providing land & marine/hydrographic survey, Diving equipment & divers, None Destructive Testing, rental & services of oil tools & equipment/machinery, chemical/material suppliers, land & sea transport & lifting equipment, etc, etc.
As can be seen, the effect of low oil price have a cascading effect all the way down to the man on the street and it’s most certainly not only about revenue to the oil producing country and company.
Most worrisome to me is that the United States of America is the world’s second biggest oil producer just a shade below the Saudis. Somehow, the US GDP dependency on the oil & gas sector is either overlooked largely ignored, under prioritized or kept low keyed by Washington. If the oil & gas sector collapsed, it will have devastating effect on the debt ridden US economy as well as to the rest of oil revenue dependent countries.
With such costly USD, US exports are already taking heavy hits and, with expected large jobs retrenchments in the oil & gas related sectors, local economy will be hit hard too since, traditionally, oil & gas workers are better paid than those in the government & private sector.
I am not sure whether grandma Yellen and the FED realize the full implication of what stronger USD and weak oil prices will have on the US economy, but my bet is they do and so will not hastily raise interest rates indiscriminately and irresponsibly.
That’s it! That’s my rumble for this week!...Have a fantastic weekend, relaxed, fresh and ready to tackle the forex market on Monday.
