Oil prices have tumbled to their lowest level in nearly six years as a glut in supply coincides with shrinking demand amid fears for world economic growth.
The plunge looks set to prove a boon for consumers as it feeds through to lower petrol costs and depressed inflation – currently at a 12-year low of 1% and expected to fall further – but hurts the prospects of UK-listed companies.
Brent crude today headed close to $51 a barrel, nearing the $50 that has not been seen since May 2009.
It continues a slide started in June, since when the oil price has fallen by more than half from a high of nearly $116 – at a time when the advance of Islamic State sparked fears over supplies from Iraq.
A combination of the US shale boom and weakness in the global economy – with the eurozone stagnant and Chinese growth slowing – has resulted in supply outpacing demand.
The oil price came under further pressure in November when, despite this, Opec ministers decided not to cut supply.
Citigroup has cut its forecast for 2015 global oil prices with analyst Ed Morse predicting that the first half of 2015 would bring “a step-up in oversupply, more volatility and turmoil”.
Oil giants BP and Royal Dutch Shell have acknowledged the impact on their business, causing them to tighten the purse strings rather than pursue some costly spending projects.
BP last autumn reported a fall in quarterly profits and said it had to maintain a “strictly disciplined approach to investment”.
Shares in the firm – which account for a slice of many UK pension funds – fell 5% on Monday, and were down by 1% today. They have lost a quarter in value since June.
Shell reported a sharp rise in third-quarter profits but chief executive Ben van Beurden said the “volatility” in prices underlined the need to keep a tight hold on costs and spending as it focused on slimmed-down future plans.
Its shares were off 2% today. They are about a fifth lower since last May.
Shippers, airlines and motorists stand to gain and Mr Morse equated the fall in the oil prices with a $1.6 trillion US dollar stimulus package for the world economy.
Bank of England governor Mark Carney last month described the fall in the oil price as a “net positive development” for the UK.
But Michael Hewson, chief market analyst at CMC Markets, said: “This continued weakness in oil prices appears to be starting to act as a drag on equity markets as investors start to look at some of the other reasons behind the move lower and focus less on the fiscal boost a lower price delivers to the final link in the chain, which is the consumer.
“Weak economic data in Europe as well as slowing Chinese demand… are reinforcing a slowing global economic narrative in the process causing investors to weigh up the risks of investing in Europe.”
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