Implications of the oil price collapse
The Brent oil price has fallen ~50%, or ~US$30 per barrel (bbl), year-to-date (Figure 1), driven by three factors: i) the impact of COVID-19 on China, with the Government lockdown driving a sharp decline in China oil demand; ii) the global spread of COVID-19, with a substantial hit to global travel and oil demand; and iii) the collapse of the OPEC plus Russia oil cartel and their subsequent moves to increase production and take market share.
Below US$40/bbl, the oil price is at levels last seen in early 2016, when OPEC attacked the US shale oil boom, and in late-2008 during the global financial crisis (GFC). In our view, these prices are unsustainable; the OPEC budget breakeven is ~US$84/bbl and US producers typically need at least US$50/bbl.
In the short-term, the Saudi-Russia price war and sharply higher inventories should keep prices low. A low-to-mid-US$30s/bbl oil price will add 0.8-1.1% to real GDP in the major economies, led by China. A hit to the US oil patch will moderate the benefit to the US. Australia will be a moderate beneficiary.
Transport stocks, typical winners from lower oil prices, face a bigger headwind from lost demand. Consumers benefit but need the capacity and confidence to spend. We remain wary of domestic consumer discretionary stocks.
Energy stocks have been beaten down by the oil price collapse. We prefer Woodside Petroleum (WPL) and Beach Energy (BPT), both resilient and offering upside as prices recover.
Market implications: The oil price collapse, adding ~1% to GDP, should help economies and markets recover from COVID-19. For transport stocks, the losses from lower demand outweigh the benefits of lower fuel costs. Households are winners but need confidence to spend – we remain wary of domestic consumer discretionary stocks. Energy stocks, down with the oil price, offer unusual value. As mentioned, we prefer Woodside Petroleum and Beach Energy, which appear resilient and offer upside as the price recovers.