Coface Sector Review: Impact of Falling Oil Prices

The recent drop in the price of oil has had repercussions for company credit risk around the world. Among the 14 sectors reviewed in its most recent Panorama, global credit insurer Coface has identified one big winner and one big loser.

Loser: North American energy sector affected by an imbalance in supply and demand

Although Coface saw a clear improvement in sector risk in North America at the end of 2014, when three sectors (Textiles/Clothing, Transport and Chemicals) were reclassified “low risk”, the fall in crude oil prices has now prompted a downgrade of the Energy sector from “low risk” to “medium risk”.

Shale and crude oil output continues to rise, while prices have halved since the summer of 2014, reflecting excess supply over demand. The oil storage facility in Cushing, Oklahoma, the largest in the United States, reached its saturation level of 77% of capacity at the end of March 2015. With the extraction costs for non-conventional oil remaining high at $50 to $70 a barrel on average, investment is falling, hitting contractors to the oil industry. Layoffs and merger-acquisitions are now taking place within the industry, with the aim of delivering synergies and reducing costs.

“North America has been particularly hard hit by the fall in crude prices which is undermining the viability of many shale oil investment projects. While the increase in risk is not uniform, depending on whether one is located upstream or downstream in the sector, the situation has an impact on all components, as the price of crude oil determines margins for both producers and operators. So the “majors” are seeing their profitability fall, which in turn affects their relations with subcontractors who then suffer as the “majors” cut back on investment because of the falling returns on investment,”explains Coface Economist Guillaume Baqué.

Winner: European Chemical industry regains competitiveness

If there is a sector that is truly benefiting from the decline in oil prices, it is the Chemical sector in Europe. Lower prices are helping to restore margins and reduce the competitiveness gap with US industry. The depreciation of the euro, which favors European chemical exports, is also making a positive contribution. In France the sector’s performance improved significantly, with a +1.9% increase in sales in 2014 in the export and domestic markets.

Taking these positive indicators into account, Coface has upgraded the European chemical industry to “medium risk”.

Other sectors are also benefiting from low oil prices, but are not subject to Coface revision at this time. One example is the sea transport business, where production costs are falling. An upgrade of the Coface asssssment is premature, however, as the continuing economic slowdown in China is dragging demand down. Another sector set to potentially benefit is the European automotive industry as it continues to recover, as evidenced by several successive months of increasing new vehicle registrations.