Bulktransporter 561 Oil Price
Bulktransporter 561 Oil Price
Bulktransporter 561 Oil Price
Bulktransporter 561 Oil Price
Bulktransporter 561 Oil Price

Impact of cheaper oil felt across the economy

March 11, 2015
Robust domestic oil production over recent years, coupled with OPEC’s decision not to cut output, has sent oil prices spiraling downward since July 2014. As US crude oil inventories continue climbing, oil producers worldwide fight to stay afloat amidst sliding prices and contracting profit margins.

Robust domestic oil production over recent years, coupled with OPEC’s decision not to cut output, has sent oil prices spiraling downward since July 2014. As US crude oil inventories continue climbing, oil producers worldwide fight to stay afloat amidst sliding prices and contracting profit margins.

Even Saudi Arabia, the largest producer in OPEC, is considering curbing its future spending on production and exploration projects. But while oil producers and consumers at the gas pumps are the most affected by falling oil prices, there are some other, less obvious markets and buyers along the supply chain that are also feeling the effects.

For instance, as producers now pare back operations following the years of heightened production that led to oversupply, demand for oil and gas field support services is falling. As a result, buyers of these services have become well positioned to negotiate more favorable pricing and terms in their new contracts. And while buyers of transportation services have also benefited from falling oil prices, changing market structures and steady demand are elevating suppliers’ pricing power, offsetting some of buyers’ gains.

Because oil’s price trend is never guaranteed and its effects are generally short term--recent volatility has actually pointed toward potential increase--buyers in these less obvious markets are encouraged to act fast. To help, IBISWorld has drilled into the details.

Oil and gas support services:

Oil drilling and gas extraction companies require myriad support services for their day-to-day operations, such as oil country tubular goods (OCTG) supply chain solutions and oilfield modeling. Suppliers of OCTG supply chain services provide consultative support for well completion projects and aid inventory management for oil and gas producers by supplying the required infrastructure. Meanwhile, suppliers of oilfield modeling services provide oil and gas producers with long-term production plans based on evaluations of an oil and gas reservoir, including drilling models, economic models, risk management services and reservoir models. So naturally, when oil and gas production rates rise, demand for both of these support services usually expands too, fueling related service price growth.

But the recent reversal in oil production levels has turned related support providers on their heads as producers tighten the reins on production in light of smaller returns. The collapse in the price of oil has made production uneconomical for numerous firms, thereby prompting spending cuts. For instance, Royal Dutch Shell, which is among the largest oil producers in the world, has announced investment cuts of $15 billion in the next three years.

Other oil producers, including BP and Chevron, have responded to plunging oil prices by cutting pay rates, implementing layoffs and delaying drilling projects. And for upstream oilfield support service providers, those spending cuts mean fewer projects and rigs to support. According to Baker Hughes, a major supplier of oilfield services, the number of oilrigs has fallen to its lowest level since December 2011. Furthermore, producers drilled 28.0% fewer oil wells in January 2015 than they did in June 2014, pushing down production volume 8.5% during the seven-month period.

Because receding oil prices have caused many firms to curtail production, providers of oil and gas field support services are being forced to react to save contracting profit margins, including implementing their own cost-cutting measures and layoffs. Additionally, they have withheld significant price increases to retain and secure customers amid falling demand, giving active oil and gas producers stronger leverage in price negotiations.

Demand and prices for OCTG supply chain solutions in particular have stagnated, reducing overall price growth during the past three years to a moderate annualized rate of about 2.0%. Similarly, IBISWorld reports that price growth for oilfield modeling services has been minimal--in fact, below inflation--rising only 1.2% during the three-year period. With oil prices bottoming out--and ever so slightly inching their way back up--producers are encouraged to negotiate multiyear contracts for oilfield support services in order to lock in current rates. This is especially important considering IBISWorld forecasts service prices to grow at stronger rates of 3.4% and 2.9%, respectively, in the next three years.

Transportation services:

Falling crude oil prices also benefit buyers of transportation services because suppliers can generally pass down operational cost savings. Fuel costs amount to a significant share of revenue for suppliers of international air cargo transportation services, national trucking services and domestic air travel. During a period characterized by trends that are pressuring prices up, including rising demand, market consolidation and regulatory change, low fuel prices are helping mitigate the effects of those trends.

Suppliers of national trucking services provide long-distance freight trucking solutions to a diverse pool of buyers, including manufacturers and retailers. Because service rates are highly contingent upon the cost of fuel, oil price trends have helped limit price growth, generally favoring buyers.

Nonetheless, prices have risen at an estimated average annual rate of 2.4% in the past three years because demand and regulatory conditions have largely outweighed the impact of falling input costs. On the back of economic rebound, total trade value has expanded, driving demand for trucking solutions. As demand and regulatory costs rise, providers are raising service rates for buyers.

Despite rising transportation service prices, buyers benefit from the wider margins and greater financial stability of market providers. Plunging oil prices and robust demand have led to a moderate level of profitability among transportation service providers that benefits buyers. While it has not drastically affected the prices they pay, it indicates relatively strong financial health and greater stability that buyers can feel confident in when procuring services. Over the next three years, though, transportation service prices are expected to trend upward as oil prices return to growth.

The future of falling oil prices:

While consumers are the only true winners of falling oil prices, there are definitely other markets along the supply chain feeling the effects--both good and bad. Oil and gas field support service firms have been challenged by cheap oil, which hampered activity in their customers’ markets and, thus, forced them to reduce prices. Meanwhile, the rebounding economy has boosted demand for various modes of transportation from consumers, manufacturers and corporate clients alike, allowing suppliers to raise prices without sacrificing business.

So while buyers in each of these markets are facing different purchasing environments dictated by the past year’s plummet in oil prices, they share in the fact that the price of oil will maintain its volatility and short-lived trends. With the price of oil forecast to increase at a steady clip during the next three years, buyers in these service markets win when they act fast and smart.

About the Author

Agiimaa Kruchkin

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