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Why there could be more to celebrate about a falling oil price than cheaper prices at the pump

by , 19 November 2014

The oil price has been on a downward slope since June. Brent crude is now trading at around $78 a barrel.

At this beginning of the year, it was up over $100 a barrel.

A lower oil price means lower petrol prices, but what else does it mean?

Let's take a closer look…


A lower oil price is good news for motorists


Motorists the world over will be happy that the oil price is falling. Chances are that will translate to lower prices at the pump.

This is certainly the case here. The only risk being the rand. If it weakens substantially, this has the potential to wipe out any oil price drops.

Just have a look at the chart below showing the drop in the oil price over the past few months…


Chart of oil price past 12 months


Why the price of oil has fallen


The oil price drop is down to the sheer abundance of it at the moment, John Stepek in Money Morning UK explains. This is partly down to shale oil production in the US.

But that’s the function of markets. When something is in demand, its price rises. Companies invest more into it so they can produce more and profit from the rise in price.

When supply is ample, the price falls. The companies have made their production processes more efficient, so the best companies will continue to produce a profit.


One sector struggling from a lower oil price


The oil and gas sector is a definite victim in all this.

Oil companies that have borrowed money on the basis of higher oil prices may end up defaulting on their debt. Bad news for owners of those bonds.

Yet, over the longer-term, the lower oil price means that you could get some great opportunities to pick up good shares in the sector at bargain prices.

This is something definitely worth keeping an eye on.

So there you have it. Why there could be more to celebrate about a falling oil price than cheaper prices at the pump.

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Why there could be more to celebrate about a falling oil price than cheaper prices at the pump
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