• 2 days Iraq Begins To Rebuild Largest Refinery
  • 2 days Canadian Producers Struggle To Find Transport Oil Cargo
  • 2 days Venezuela’s PDVSA Makes $539M Interest Payments On Bonds
  • 2 days China's CNPC Considers Taking Over South Pars Gas Field
  • 2 days BP To Invest $200 Million In Solar
  • 2 days Tesla Opens New Showroom In NYC
  • 2 days Petrobras CEO Hints At New Partner In Oil-Rich Campos Basin
  • 2 days Venezuela Sells Oil Refinery Stake To Cuba
  • 3 days Tesla Is “Headed For A Brick Wall”
  • 3 days Norwegian Pension Fund Set to Divest From Oil Sands and Coal Ventures
  • 3 days IEA: “2018 Might Not Be Quite So Happy For OPEC Producers”
  • 3 days Goldman Bullish On Oil Markets
  • 3 days OPEC Member Nigeria To Issue Africa’s First Sovereign Green Bond
  • 3 days Nigeria To Spend $1B Of Oil Money Fighting Boko Haram
  • 3 days Syria Aims To Begin Offshore Gas Exploration In 2019
  • 3 days Australian Watchdog Blocks BP Fuel Station Acquisition
  • 4 days Colombia Boosts Oil & Gas Investment
  • 4 days Environmentalists Rev Up Anti-Keystone XL Angst Amongst Landowners
  • 4 days Venezuelan Default Swap Bonds At 19.25 Cents On The Dollar
  • 4 days Aramco On The Hunt For IPO Global Coordinators
  • 4 days ADNOC Distribution Jumps 16% At Market Debut In UAE
  • 4 days India Feels the Pinch As Oil Prices Rise
  • 4 days Aramco Announces $40 Billion Investment Program
  • 4 days Top Insurer Axa To Exit Oil Sands
  • 5 days API Reports Huge Crude Draw
  • 5 days Venezuela “Can’t Even Write A Check For $21.5M Dollars.”
  • 5 days EIA Lowers 2018 Oil Demand Growth Estimates By 40,000 Bpd
  • 5 days Trump Set To Open Atlantic Coast To Oil, Gas Drilling
  • 5 days Norway’s Oil And Gas Investment To Drop For Fourth Consecutive Year
  • 5 days Saudis Plan To Hike Gasoline Prices By 80% In January
  • 5 days Exxon To Start Reporting On Climate Change Effect
  • 6 days US Geological Survey To Reevaluate Bakken Oil Reserves
  • 6 days Brazil Cuts Local Content Requirements to Attract Oil Investors
  • 6 days Forties Pipeline Could Remain Shuttered For Weeks
  • 6 days Desjardins Ends Energy Loan Moratorium
  • 6 days ADNOC Distribution IPO Valuation Could Be Lesson For Aramco
  • 6 days Russia May Turn To Cryptocurrencies For Oil Trade
  • 6 days Iraq-Iran Oil Swap Deal To Run For 1 Year
  • 9 days Venezuelan Crude Exports To U.S. Fall To 15-year Lows
  • 9 days Mexico Blames Brazil For Failing Auction

Breaking News:

Iraq Begins To Rebuild Largest Refinery

Alt Text

Why Oil Prices Bounced Back

Trump’s decision to officially recognize…

Alt Text

Why Isn't Wall St. Backing The Next Shale Boom?

Despite rapidly tightening oil markets,…

Alt Text

Cyberattacks: The Biggest Threat To OPEC

As OPEC countries adopt automation…

Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

More Info

How The Federal Reserve Will Shape Oil Markets In 2017

Federal reserve building

The energy sector over the next few years may look markedly different than it has over the last few years. Aside from political changes and OPEC’s rebalancing efforts, the markets are also facing a different dynamic with the Federal Reserve – interest rate hikes.

The Fed cuts interest rates from more than 5 percent in 2007, to as little as 0.25 percent by 2009. These cuts were intended to help stimulate and stabilize an economy suffering from the worst recession since the 1920s. The Fed’s actions alone were not enough to stabilize the economy though, so the Federal Government stepped in and lent large amounts of money to all of the major financial institutions in the U.S., and Congress passed the American Recovery and Reinvestment Act of 2009 which included a range of economic support measures including tax breaks and infrastructure spending.

The combination of actions from the Fed and the Federal Reserve helped to stabilize the financial markets and, since that time, the unemployment rate has consistently crept lower. Today the U.S. unemployment rate stands at 4.7 percent - the same rate as January 2006. Against this backdrop the Federal Reserve appears poised to reverse its monetary easing and start to hike rates over the next few years. Related: 5 Energy Stocks To Watch In 2017

Analysts speculate that “a rate hike would strengthen the U.S. dollar, which would make oil more expensive globally, so this would tend to reduce oil demand slightly, but it takes a while for this effect to play out, and would therefore likely reduce oil market price.” In essence the problem for the rest of the world is that oil is priced in U.S. dollars, so as their currencies get weaker against the dollar, oil costs relatively more. That in turn should dampen demand for the ROW.

For any individual 25 basis point hike, the effect on foreign demand for oil is likely to be modest – perhaps about the same as a $1 increase in the price per barrel of oil. At the same time, the cumulative effect of many rate hikes could be significant. With the Federal Reserve rate now below 1 percent, to get back to the long-term average of roughly 5 percent to 6 percent, the Fed would need to hike rates 15-20 times by a quarter of a point each time. Cumulatively, that could have a major impact on oil’s affordability in some countries.

All of this is good news in general for oil exporters including the shale producers, but bad news for oil importers such as some refiners. Unfortunately for the refiners, while oil trades like a uniform commodity, it is far from it, so switching between different blends of oil is generally difficult.

The same logic holds true for countries – oil exporters like Venezuela, Saudi Arabia, and Russia will all benefit from a stronger relative oil price (in USD), while importers like China and India will have significant problems for any oil imports where the prices are not hedged.

Investors should position themselves accordingly.

By Michael McDonald of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Crazy Uncle on January 18 2017 said:
    Michael,

    Any thoughts on interest rate increases and the effect on shale's ability to borrow money? The business plan has seemed to be this.... Borrow money from people chasing yield, then dilute shareholders to payback debt. How does shale stay on the drilling treadmill in an normal interest rate environment?

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News