Higher Oil Prices A Negative For Growth, Earnings
- Higher oil prices will impact on global growth this year - Current prices already offer some evidence of demand destruction - Goldman Sachs identifies market sectors likely to be impacted in Australia
By Chris Shaw
Geopolitical tensions, loose monetary policy and an ongoing US economic recovery combined to deliver a strong first quarter of 2011 for oil prices. As Standard Bank notes, in year-to-date terms front-month West Texas Intermediate (WTI) and Brent prices have gained more than 20% and 30% respectively.
One consequence of the rapid increase in prices in Standard Bank's view is consumers are being squeezed, as high oil prices are impacting on oil product demand. As evidence, the bank notes implied demand in the US for gasoline and distillates has shown signs of decline in recent weeks.
JP Morgan agrees, estimating the oil price gains in the first quarter of the year have subtracted between 0.5-1.0% from global growth during the period. A similar impact is expected in the second quarter.
In JP Morgan's view the impact on growth this time around is more apparent than in 2007/08 when oil prices similarly rallied, as this time the oil price spike is being driven by a supply shock rather than a surge in demand.
Standard Bank expects the market's focus relative to US oil inventory reports in coming weeks will be on changes in demand. In particular, the market will look for signs of demand destruction caused by higher oil prices.
Barclays Capital agrees coming data will be of interest, suggesting if oil prices were to move even higher the economic effects could become quite significant. Barclays estimates an oil price of US$150 per barrel could add as much as 3.0% to global inflation and impact on global growth by as much as 0.75%. These changes would also create new global trade imbalances.
As well, Barclays suggests energy prices driven higher by supply side issues could mean significant policy challenges, as the choice could come down to one between higher inflation or lower growth.
The importance of energy inflation is more evenly spread across countries than food price inflation for example, but remains significant in the view of Barclays. Barclays oil analysts' numbers suggest a 10% oil price increase raises inflation by 0.4% in advanced economies and by 0.6% in emerging market economies after one year.
The growth effect depends on whether higher oil prices stem from a supply or demand shock according to Barclays, as the former tends to coincide with lower growth and the latter with faster growth. Barclays suggests the oil price surge in recent weeks closely resembles a supply shock.
In trying to quantify a possible impact Barclays has also run scenarios of higher prices, estimating a 10% oil price increase lowers economic growth by 0.1% after one year. If the oil price was to reach US$150 per barrel, Barclays suggests global growth would likely drop by around 0.75%.
In terms of the impact on Australian companies from higher oil prices, Goldman Sachs has run an analysis to assess which companies in Australia are most at risk in terms of earnings. A key focus is the rate of change in the oil price, Goldman Sachs pointing out an 80% or greater oil price increase over a 12-month period has a negative impact on equity markets in the coming one to two years.
An oil price of US$140 per barrel before September of this year would see this critical level reached.
Taking a broad view, the energy intensive aviation and transportation sectors and stocks, which includes the likes of Qantas ((QAN)), Virgin Blue ((VBA)) Asciano ((AIO) and QR National ((QRN)), are most exposed to higher oil prices.
Other exposed sectors include building materials, which means GWA Group ((GWA)), James Hardie ((JHX)), Boral ((BLD)) and Adelaide Brighton ((ABC)), and food and beverages, including Coca-Cola Amatil ((CCL)), Foster's ((FGL)), Goodman Fielder ((GFF)) and Select Harvest ((SHV)).
As well, Goldman Sachs expects the developers and contractors and services companies are also likely to be impacted by higher oil prices. Stocks included here are Boart Longyear ((BLY)), Leighton Holdings ((LEI)), Downer EDI ((DOW)), Spotless ((SPT)), Transpacific Industries ((TPI)) and Transfield Services ((TSE)).
While the resources sector should also experience some earnings impact via higher operating costs, Goldman Sachs notes it is difficult to accurately estimate the impact. As a result, stocks in this sector have been excluded from the analysis. Other stocks where some impact could be expected include Caltex ((CTX)), Amcor ((AMC)), Toll Holdings ((TOL)) and Dulux ((DLX)).
Among the companies listed by Goldman Sachs, the FNArena database shows Sentiment Indicator readings of 1.0 for Qantas, 0.9 for Amcor, 0.7 for GWA, Boart Longyear and Transfield, 0.6 for Adelaide Brighton, 0.5 for Asciano, Coca-Cola and Dulux, 0.3 for Virgin Blue, Downer EDI and Toll, 0.2 for Transpacific, 0.1 for Spotless and Fosters, 0.0 for Goodman Fielder, minus 0.1 for James Hardie, minus 0.2 for Caltex, minus 0.3 for Boral and Leighton and minus 0.5 for QR National.
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