Oil’s price closed just shy of $60/bbl last week. As of this writing, oil’s price is above $60/bbl again. Oil is a unique economic good. Everyone in the economy depends on it and there are no cheaper substitutes. As a result, when oil’s price increases, everyone – raw materials companies, companies that process, develop and convert raw materials into goods and the consumers who purchase there goods – has to deal with price increases.
At some point, oil’s price increases will reach a tipping point where companies can no longer absorb the price increases and instead be forced to pass the increases on to consumers. When this happens, it is more than likely that energy costs will slowly eat into corporate profits.
According to the Financial Times:
“Shares in energy-intensive companies such as manufacturing and transport were hardest hit. Yet even those companies that have previously minimized the pain by passing on price increases to their customers are finding it harder to do so.
FedEx, for example, the US delivery group that has been a leading beneficiary of booming global trade, broke its winning streak by warning that this quarter’s earnings would be hit by jet fuel costs despite an automatic surcharge for customers.
And the metals industry, enjoying its best growth for years, is squeezed between the high cost of energy-related inputs such as electricity and coal and slowing demand from leading customers.
Few companies, wherever they are, can escape rising energy prices entirely, and most will eventually look to pass costs on. Vimal Shah, chief executive officer of Bidco, a Kenyan manufacturer of cooking oils and soaps, has seen its energy and transport costs rise 20 per cent.”
Last week there was an inverse relationship between the price of oil and the stock market. As oil neared $60/bbb, the market tanked. Oil was sited as a primary reason for the drop. It appears traders are of the opinion that $60 oil represents the embarkation line between increasing and decreasing profitability based on oil. Should oil’s price continue to climb, the market could hit a very rocky road.
There is little chance of a major retreat in oil prices. This is a classic case of demand outstripping supply. According to a recent OPEC report, world oil demand was approximately 1-2 million barrels a day higher than supply.
http://news.ft.com/cms/s/f54fa416-e689-11d9-b6bc-00000e2511c8.html