Low Oil Prices Are Great, But They Really Bum Out The Pessimists

MS oil loopMorgan StanleyThe oil price loop of fear.

People have lots of ideas about what is causing the crash in oil prices. 

And with oil prices off more than 50% over the last six months, a number of analysts on Wall Street have begun outlining the benefits of these lower prices, which serve as a tax cut for consumers and lower operating costs for companies in a number of industries. 

But a new note from analysts at Morgan Stanley shows how these benefits tend to be ignored by investors who instead see the “glass half empty” view of falling oil prices. 

“Lower oil is unequivocally positive for global growth, shifting wealth from countries with a higher propensity to save to those with a higher propensity to consume,” Morgan Stanley’s Andrew Sheets writes. “While there are negative side-effects (less capex spending on oil), in our view these are small relative to the positives.” 

Sheets adds that, “Falling oil prices have encouraged lower inflation expectations, aiding the rally in rates. They have generated weakness in high yield and emerging market credit. Equity markets, confronted with falling rates and widening spreads, have understandably been nervous that they’re missing a major turn in growth.”

And here are the key stats related to oil’s plunge that Sheets highlights.

  • US$49: Current price of Brent crude (per barrel).
  • US$97: Average price since January 1, 2010.
  • 54%: Six-month decline in the oil price.
  • 41%: Six-month decline in US gasoline prices.
  • 1%: Oil capex spending as a % of US GDP in 2013.
  • 17%: Share of ‘energy’ within the US high yield market.
  • 746bp: Spread of the US HY energy sector.
  • 48%: Five-year default rate implied by that spread (assuming 40% recovery).

As Sheets writes: “Lower oil — a blessing that feels like a curse.” 

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