"Over most of the last twenty three years the price of oil in the US, usually referenced to the WTI benchmark has traded at the same price as oil in Europe normally published as Brent. Since early 2011 the gap between the two has gradually widened to such an extent that now American oil is about US$13 a barrel cheaper. The reason of course is the widespread use of fracking in the New World that has opened up lots of new fields and supply. It promises to make the US energy independent in the future. This price disparity does create all sorts of issues in the oil, and especially in the refining industry, but it has two important implications for the mining sector.
Firstly, given the weight of oil in most commodity indices, it has the effect of depressing these benchmarks and encourages investors to reduce their allocation to all commodities. This was a major factor in the underperformance of mining stocks earlier in the year even though metal prices did not decline that much.
The second effect of lower oil prices is to reduce operating cost across large chunks of the economy, particularly in mining and also for consumers. While the reduction in fuel costs won’t transform the mining industry, at least not on the scale seen so far, it will help to ameliorate the impact of declining revenues. More importantly it will help to boost consumer spending across the world and that can only boost economic growth and hence demand for metals.
So far few economists seem to have factored in lower oil prices into their growth forecasts. It is of course conceivable that it won’t actually happen. But if it does though the impact could be quite significant and act to compensate for the removal of the US$85 billion injection from the US Federal Reserve every month.
Lower oil prices won’t be so warmly welcomed in places like the Middle East, Russia or Venezuela, which is probably no bad thing. It will also continue to have a depressing impact on commodity indices. While that may encourage some capital allocation away from commodities to equities mining stocks, being pro-growth, may not be so badly affected''.
Source: Minesite
