Falling Oil Prices – The Winners and Losers - August 31, 2015

Falling Oil Prices – The Winners and Losers

Oil prices have been falling to record lows for the last few months. This is even more striking, since in the last 6 years we got used to high prices for crude, sometimes over $100. Lately, prices are nearly reaching $40 per barrel, usually staying at around $45-50. Although many analysts believe that prices will not stay this low, there are already both winners and losers.

Countries dependent on producing and exporting oil were hurt with the falling prices. Russia’s rouble for example hit record lows compared to the USD. As Financial Times mentioned: “The dollar has climbed 0.9 per cent against the rouble to a new six month high of Rbs65.83, making it the worst performing major currency today.” This is understandable: approximately 15% of Russia’s GDP and 70% of its exports are produced by oil and gas sector.

It is important to mention that the problems of Russian economy are not solely caused by the low oil prices, since the western sanctions are also hurting the country’s market. Nonetheless, falling oil prices and the sanctions together pushed the economy into recession, and domestic demand does not seem to be strong enough to start a recovery soon.

But the low crude price (and rouble’s weakness) also took a toll on Kazakhstan. Last week, the oil-rich country’s currency devaluated rather fast: after removing the trading band, tenge lost more than quarter of its value. This is not a first time for tenge to be devalued, in February 2014 the central bank cut the currency by 19 percent.

Some believe that this devaluation can help the Kazakh economy, the prime minister said that this will help the country to compete better. Also, the currency is now determined by the market, not by the government, which might be healthier.

But at the moment, the global market is not optimistic: China’s serious problems with its stock market has already influenced the western markets as well, and “Black Monday” made a huge impact on all the major indices. These new events will definitely not help the recovery of oil dependent countries.

And against all fears of a new global crisis, it seems that the USD and the Euro is holding strong compared to the emerging market currencies like the rouble. US Dollar has been performing very well since last summer, hitting 12-year high against the basket in early March, since then a complex correction took place as we expected in an earlier analysis. However, after the past days' price slump on the global markets, there is high chance to see the dollar rise again as well as the leading indices recover after the big hit. Crude oil continuous price fall fits to Innovative Securities analysis published February 2015, namely rising oil prices that we experienced in spring 2015 was probably not the one that will make a turn, it is quite possible that prices will fall back to $30-40 (WTI), however, it will not remain at that level. What’s more, some nice turnaround may shape in the coming 1-2 years.

As for now, it seems that keeping our money in western currencies instead of rouble or tenge (or other oil-dependent country’s currency) can help us not only to protect the value of our investments, but even to reach some profit thanks to the capital gains. Returns of a well diversified portfolio can also add up to that, making even problematic times profitable to us.

Disclaimer: Innovative Securities’ Profit Max investments are in USD and Euro. This analysis is for general information and is not a recommendation to sell or buy any currency.