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Investment Times

Oil price tumbles but is it sustainable?

| 24 December 2014 | A A A
Oil price tumbles but is it sustainable?

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

The price of a barrel of oil has seen a huge drop in recent months from over $110 in July to under $65 at time of writing (12 December). This is due to demand falling, while OPEC has maintained its level of supply. This should be a significant boost to the global economy as we approach 2015. It has a similar effect to a tax cut, reducing the import bill for countries reliant on oil. It should also feed through to lower transport and material costs for companies.

Consumers could also benefit. Falling petrol prices and companies passing on cost savings should contribute to falling inflation. Even a few extra pounds in the pocket could ease pressure on household budgets and increase consumer spending.

Longer-term the oil price is likely to rise again. While some nations can produce oil relatively cheaply they need to sell it for a much higher price to meet their spending commitments and balance their budgets. If the price remains subdued for a prolonged period they are likely to mothball unprofitable operations and cut supply in an effort to drive the price up. Furthermore, while demand for oil has fallen in the short term it should increase over the longer-term, particularly as developing nations continue to industrialise.

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Supply and demand imbalances rarely last long and ultimately a finite resource with increasing demand should rise in price. Meantime, while the price remains subdued, we are positive on the impact this should have globally on economies, companies and consumers.

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