Decade Low Oil Pressures Growth, Credit Markets


Oil prices plummeted to their lowest point in 11 years, prompting fears that energy companies will prove unable to pay back loans, which could cause rippling financial weakness throughout the global economy.  Brent crude oil prices fell to $36.52 during Monday trading in European markets, while global supplies, especially in the United States, remain at record high levels.

Part of the sell-off traces back to a historic decision to lift the ban on oil exports in the United States. Last week, Congressional leaders agreed to lift the ban and allow American companies to export crude oil, ending a 40-year old ban on exports that limited supplies throughout the world.

Historically, high production in the Middle East, Russia, and Latin America, combined with surging demand in emerging markets, caused oil prices to climb both in the global and American markets. Now that oil consumption growth is decelerating and American oil regain admittance into those emerging markets, traders expect Brent futures to fall and oil to remain weak for the near term.

OPEC Firm on Output

Simultaneously, OPEC said that it would not cut oil outputs, announcing Monday after a meeting of the cartel that it will not lower its oil output despite rising export expectations from America and a global supply glut.

Analysts express mixed opinions on OPEC’s motivations in keeping output high despite weak prices. On the one hand, the move represents a geopolitical tactic to threaten revenues for energy-exporter Russia. Other analysts, however, point to lower energy consumption thanks to higher efficiencies and the rapid rise of alternatives, which combined could mean a return to high-priced oil may never occur—and oil consumption might be a thing of the past in a few decades, if not sooner.

However, some analysts believe oil reserves may begin to fall next year in some parts of the world, although overall inventories will remain strong. The International Energy Agency said in a report that supplies from outside of OPEC would fall in 2016, but “there will still be a lot of oil weighing on the market."

Credit Markets

Lower energy prices have roiled credit markets throughout 2014 and 2015 as traders fear higher default rates coming from energy companies whose revenues have fallen beyond their ability to pay back bondholders and creditors.  As a result, high yield credit markets have seen a sharp decline throughout the last 18 months that accelerated sharply in recent weeks, with some analysts believing that default rates are set to continue. Moody’s announced rising default rates in speculative grade credit markets throughout 2015.

Additionally, some analysts fear energy dependent regions, such as Alaska, Houston, Venezuela, Russia, and Saudi Arabia, will see fundamental economic weakness that could spread to neighboring regions.