How did we get here?
Last summer the price of Brent Crude was around US$115/bbl and had been stable for many years but by January 2015 it had dropped below US$50/bbl. The fall was largely unexpected and whilst much speculation exists around when (and if) prices will rise again and importantly, at what level they will stabilise, the truth is no-one knows with any certainty.
The global oil price is determined by a vast range of complex supply and demand side factors but the recent fall is largely the result of three main drivers:
1) new alternative sources of shale oil hitting the market in North America over the last few years;
2) slowing growth in global demand (especially China); and
3) no subsequent adjustment to production levels by the Organization of Petroleum Exporting Countries (“OPEC”).
Despite a small recovery in prices in February, to over US$60/bbl, continuing uncertainty surrounding the Eurozone and global demand mean that price rises have not stabilised and Brent Crude had fallen back to around US$55/bbl at the time of this publication. In the medium term, many forecasters are predicting very gradual price rises and the World Bank’s latest forecast suggests pricing will remain below US$70/bbl until 2020.
You win some…
In general terms, lower oil prices will be good for local businesses. Logistics and haulage costs will be lower than budgeted and many companies we’ve been speaking to significantly out-performed their Q4 budgets for 2014 in this respect. These gains over the prior year should continue well into 2015.
With lower motoring costs, consumers’ disposable income is higher and more money in customers’ pockets is providing a much needed boost to confidence in the retail, hospitality and leisure sectors. We have seen particular evidence of this with a number of our Norfolk and Suffolk based hospitality clients seeing improved booking levels for Easter and summer 2015.
East Anglia’s agribusiness and food suppliers will start to see benefits through the course of 2015 as the lower oil price slowly flows into lower fertiliser, feed and transportation costs and eventually our manufacturing businesses will see cheaper plastics and raw materials input costs.
When comparing cost performance to prior years, the first half of 2015 should be much improved over 2014 but business owners and stakeholders should be realistic and not expect the same incremental gains to be made in the second half of this year as improvements were already being felt in late 2014.
You lose some…
Clearly the flip side to the benefits is the impact the price will have on the region’s oil and gas businesses. North of the border, we have already seen most of the major oil companies making reductions in capital expenditure budgets with many job cuts already announced. Whilst to date our region has missed the worst of this, due largely to diversification into the gas, nuclear and renewables sectors, there is no doubt the scaling back of investment will have some knock-on effect on the local energy sector.
Many companies we work with are very well sheltered from the impact; either with well-funded balance sheets, international parent companies or diverse products and services that do not just focus on a single market. However others will need increasing support over the coming months. This may come in the form of raising new finance, careful cash management or implementing cost-cutting measures and turnaround plans.
What we can do…
At JDC Corporate Finance, we recognise that such a fundamental shift will bring both opportunities and challenges for our clients. We are expecting more consolidation in the sector and our transaction team is already advising some of our more acquisitive clients, who see the price fall as an opportunity to grow and expand their businesses.
If you are one of the winners benefiting from lower input costs or strengthening consumer demand, do not take it for granted. Accurate and realistic budgeting is needed to recognise the underlying cause of any gains and careful strategic planning will be needed to ensure the benefits can be sustained for the longer term. We can carry out a strategic review to help you with this.
Finally, for those facing increasing uncertainty and with a need to reforecast or make cost savings, our Business Growth Services team has the right depth of skills and experience to help you steer through the current challenges.
Chris Adlam - firstname.lastname@example.org