What is not to love about cheap oil? Low oil prices reduce our monthly fuel costs, moreover they leave us with more leftover cash to spent in other sectors. Does this mean, that someone else is paying the price of our convenience ?
The top three net oil exporters are Saudi Arabia, Russia and Iran. Their economies rely strongly on the income of those oil exports, because that is their main source, which they can use to finance their government budget. Oil prices reached a 7-year low of 43 dollar a barrel. How bad is that? A breakeven price is the amount of money for which an asset must be sold in order to cover the costs of acquiring and owning it.
The breakeven prices for Saudi Arabia is little above 90$ as for Russia and Iran is respectively around 100$ and 135$. Those price levels are way off the current market levels. In this case the net oil exporters pay the price by gaining only budget deficits. They will be engaged in acquiring or issuing debt in order to finance their budget holes. Cheap oil leads to fewer jobs in the energy sector, currency devaluation, national stock plunges.
We see this as a game of chairs. The one, who can acquire more debt and sustain during the bear market without reducing exports, will declare victory. Otherwise reducing exports now will result in losing market shares in the future.
Many investors began investing in junk bonds because of higher yields. Over 50% of the junk bond market is composed of long term oil-related investments. They are very vulnerable to oil prices, which can erase their value, making them unattractive to investors. Some investors even say, that if oil is too cheap, it should stay in the ground. Low prices discourage investors and damage the energy sector. Negative mood has taken hold of the crowd, more and more people are getting bearish on the long term prices direction and the future of the sector.
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