• 5 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 10 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 14 hours Russia, Saudis Team Up To Boost Fracking Tech
  • 20 hours Conflicting News Spurs Doubt On Aramco IPO
  • 21 hours Exxon Starts Production At New Refinery In Texas
  • 22 hours Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 2 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 2 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 2 days China To Take 5% Of Rosneft’s Output In New Deal
  • 2 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 2 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 2 days VW Fails To Secure Critical Commodity For EVs
  • 2 days Enbridge Pipeline Expansion Finally Approved
  • 2 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 2 days OPEC Oil Deal Compliance Falls To 86%
  • 3 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 3 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 3 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 3 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 3 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 3 days Aramco Says No Plans To Shelve IPO
  • 5 days Trump Passes Iran Nuclear Deal Back to Congress
  • 6 days Texas Shutters More Coal-Fired Plants
  • 6 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 6 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 6 days Chevron Quits Australian Deepwater Oil Exploration
  • 6 days Europe Braces For End Of Iran Nuclear Deal
  • 6 days Renewable Energy Startup Powering Native American Protest Camp
  • 7 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 7 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 7 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 7 days India Needs Help To Boost Oil Production
  • 7 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 7 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 7 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
  • 7 days District Judge Rules Dakota Access Can Continue Operating
  • 8 days Surprise Oil Inventory Build Shocks Markets
  • 8 days France’s Biggest Listed Bank To Stop Funding Shale, Oil Sands Projects
  • 8 days Syria’s Kurds Aim To Control Oil-Rich Areas
Alt Text

China Takes Aim At The Petrodollar

In a potentially disrupting move…

Alt Text

The New Challenger To Lithium Batteries

The lithium-ion battery is head…

Alt Text

What’s Stopping An Oil Price Rally?

Oil prices rallied in Q3…

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

What Would Negative Interest Rates Mean for the Oil Market?

What Would Negative Interest Rates Mean for the Oil Market?

The dour economic environment is continuing to resist the best efforts of policy makers and central bankers around the world. The latest evidence of just how tough it is proving to move the global economy above a stall speed came a few weeks ago when Japan announced negative interest rates in an effort to boost its still flagging economy.

Negative interest rates are essentially fees that companies are required to pay in order to hold cash with banks. Similarly, banks can be charged fees for holding cash with the Central Bank. What makes negative interest rates so interesting is that the world has never seen a period of widespread negative rates in recorded economic history. As a result, the exact effect of such rates is somewhat unclear. Related: U.S. Unable To Halt ISIS March Towards Libyan Oil

In theory, negative rates should lead banks to be willing to lend funds to creditworthy borrowers at even lower levels, and companies should be more willing to spend and invest cash. That’s just theoretical though. The reality is that banks are never going to actually pay people to borrow money from them (i.e. true negative interest rates), and companies will only invest money in projects that they think are profitable. That is the challenge for oil companies in a negative interest rate environment.

Oil companies are suffering right now, not from lack of access to capital, but from lack of economical projects to invest in. At current oil prices, there are virtually no fields that make economic sense to develop. As a result, negative interest rates are unlikely to boost oil supply further. Related: Is This The Most Bullish News For Oil Since 2014?

That said, negative interest rates could have two possible effects on oil companies. First, negative interest rates could hurt oil companies if banks begin to charge the firms for access to capital and holding liquid cash and securities. Right now, many oil companies are looking to ensure they have plenty of cash to ride out the on-going storm. New capital spending and investment is the furthest thing from their minds. To the extent that maintaining this liquidity becomes more expensive, negative interest rates could further exacerbate an already bad situation for oil companies.

Second, negative interest rates might play a role in helping to boost the flagging global economy and rekindle demand for oil. This is very speculative. The effectiveness of monetary policy at zero interest rates is often compared to pushing on a string. Related: Oil Price Volatility And Market Predictions

Still, if policy makers can figure out how to effectively implement lower rates in the weaker economies of the world like Japan, then it could help to provide a global boost. This will require creativity and commitment, but so far those are qualities the new Japanese Central Bank has in spades. Even as the U.S. is starting to raise rates, Japan, Europe, and China are all still in a weak or even decelerating position. If negative interest rates can offset these ill effects, then it should help oil companies.

There are a lot of unknowns related to negative interest rates, and certainly no one can claim to understand all the ramifications for what is largely an unprecedented experiment. There are dangers for oil companies especially those that need to hold cash for liquidity purposes, but if negative interest rates can do anything to boost the global economy, then they will ultimately do far more good than harm for oil prices.

By Michael McDonald Of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




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