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Moody’s examines impact of low oil prices on various industries worldwide; adjusts oil price assumptions

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Tumbling oil prices have led Moody’s Investors Service to lower its pricing assumptions for the two benchmark crude oils, European Brent and West Texas Intermediate (WTI), the rating agency said today in a new report that also looks at how a sustained period of lower oil prices would affect numerous industries around the world.

Industries for which fuel is a direct and significant cost will see a positive effect from lower oil prices, as will consumer-dependent businesses more generally, since lower gasoline prices mean consumers will have more cash to spend on other items. But oil and gas exploration and production companies, and the companies that supply them, will be hurt by lower crude prices, according to the report, “Global Corporate Finance: Airlines, Packaged Food, Shipping Get Biggest Lift from Oil Price Plunge”

Moody’s revised its assumptions for average spot prices for Brent crude to $55 per barrel through 2015, to $65 per barrel in 2016 and to $75 in the medium term, and for WTI crude to $52 per barrel in 2015, to $62 per barrel in 2016 and to $75 in the medium term.

“At the start of 2015, crude prices of about $50 per barrel reflected factors including growing non-OPEC supply, supply outpacing demand worldwide and Saudi Arabia’s decision not to keep acting as OPEC’s swing producer,” says Managing Director, Steve Wood. “While we see no catalysts that would change the supply-demand equation in the near term, our long-term oil price assumptions reflect our view that prices will eventually rebound.”

–Positive impact for many non-financial, non-energy industries, but bad news for others–

Airlines, shipping and packaged foods are among the business sectors that will benefit most from lower oil prices, while the oil exploration and production and oilfield services sectors will bear the brunt of the collapse.

“Passenger airlines’ financial performance will improve in 2015 as a result of lower fuel costs,” says a Moody’s vice president, Jonathan Root. “American Airlines should realize the maximum benefit, but Delta, United, Lufthansa and Air Canada will also be among those that gain.”

Conversely, the suppliers of aircraft and components could suffer as falling prices increase the risk of order cancellations and deferrals down the supply chain. “Oil prices have fallen to a level that significantly reduces the operating cost benefits airline customers will realize from new fuel-efficient aircraft on order compared to when orders were placed, when Brent crude averaged more than $80 a barrel,” says a Moody’s senior vice president, Russell Solomon. “As a result, we expect order deferrals and cancellations to increase beyond the bump that has recently been anecdotally noted.”

Sustained lower prices will also boost the margins of processed food manufacturers such as Nestle´, Mondelez International and Kraft Foods, which spend 10%-15% of the cost of goods on freight and fuel. These companies should also see sales increase as cheaper oil leads consumers to spend their extra cash on discretionary food items. Restaurants will likely benefit for the same reason, though not as dramatically, with quick-service outlets such as McDonald’s and Wendy’s benefiting from lower-income consumers, who tend to see the biggest increase in their disposable income when gas prices are low.

Falling oil prices will be modestly positive for automobile makers, Moody’s says. In North America, demand will shift toward larger, higher-margin vehicles such as SUVs at the expense of smaller, more fuel-efficient models. Sales should improve for companies including General Motors and Ford. But sales aren’t likely to improve much in the saturated Japanese market, and since motorists there don’t drive as much on a daily basis as they do in the US, they are less likely to shift to larger cars. Additionally, high taxes in both Japan and Europe are likely to blunt the impact of cheaper crude on car sales.

Moody’s research subscribers can access this report at http://www.moodys.com/viewresearchdoc.aspx? docid=PBC_1001985.

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