What if oil stays low long-term?

Natixis is looking in this cross-expertise research paper on the oil market and addresses the questions of whether the oil price will stay low in the long term and what effect this would have. Please find the full research paper attached on the left.

  • The oil shock has not only surprised in terms of scale but also raises the
    issue of its duration. The world economy and financial markets will be all the more
    impacted if oil does not promptly return to its average and trends in a fluctuation
    range close to current levels. Outside our core scenario (Brent at $60/b in 2015 and
    $70/b in 2016), it is this prospect of lastingly low oil, at $52/b in 2015 and $56/b in
    2016, that our report explores.
  • After presenting the factors underlying this scenario – oil demand trend,
    responsiveness of current production, environmental policies and strategic stakes –
    we analyse the macro implications. These are the fruit of vast revenue
    redistribution between exporting and importing countries, clear increase in
    deflationary pressure, and a positive supply shock for many sectors. This leads to
    modification in terms of trade, a strengthening of purchasing power and an
    opportunity for companies to pick up their margins and underpin the investment
    cycle. All these items maintain the nascent imbalance between developed and
    emerging economies.
  • The macro vision is accompanied by sector impacts, direct and indirect, that
    vary broadly between sectors. For the directly concerned sectors, impacts are
    very negative on the earnings and financing of oil groups and hence on
    development prospects. Sharp reductions in investment have already been
    announced and a cut in operating costs is likely to follow. Despite these cuts,
    balance sheets will remain under pressure, encouraging the sector reshuffle
    underway. The OCTG tubes sector is particularly hard hit after the massive
    investments in new capacities in the previous cycle, while pressure in oil services is
    likely to lead to a phase of restructuring and consolidation. For credit, the
    consequences are direct on American HY owing to the overrepresentation of energy
    in credit indices, increasing the likelihood of default on this segment.
  • Indirectly, lastingly low oil leads to identification of losers and winners
    (mainly), notably depending on operating costs (for example for airlines), and
    supplementary consumption impact (Retail, Food-FMG, Media, Construction
    Concessions, Hotels & Leisure) for various sectors. As for socially responsible
    investment, the key point lies in the capacity of states to meet their carbon
    commitments. Lastly, econometric analysis of the relations between sector subindices
    making up the Eurostoxx and the oil price helps determine a basket of
    sectors benefitting from oil that stays low long term.