High Oil Price - How will Industry Giants be affected?

High oil price - How will industry giants be affected?

9:49 AM, 15th May 2018
High Oil Price - How will Industry Giants be affected?

ARIZONA, US: An upsurge of crude oil prices by 50% previous year was appreciated by oil corporations, but generated anxiety among the large industry giants in various sectors. The concerns that US President Donald Trump will terminate the agreement on the Iranian nuclear program have led to a rise in crude oil prices above 70 USD per barrel last week for the first time since the end of 2014. Wall Street has already anticipated higher profits for companies like ExxonMobil, Chevron and Continental Resources.

But the high oil prices and the price of 3 USD per gallon of gasoline (3.8 litres) in the US will be taken with concern not only by American drivers but also by managers of large companies such as Hershey and Sherwin-Williams. The same applies to some companies in the chemical industry, food packaging, retail and transport.

The manufacturers of chemicals are particularly vulnerable because they use crude oil as the main ingredient. At least half of the costs of companies such as PolyOne, Univar and KMG Chemicals are related to oil and derivatives.

Eastman Chemical, Huntsman and the giant in the paint industry Sherwin-Williams also spend much on oil. Costs of raw materials “are heading in the wrong direction”, says company chief financial officer Allen Mistysyn.

Oil is a big expense for Goodyear Tire & Rubber as well as for automotive parts such as AutoZone, Advance Auto Parts and Adient.

The consumer goods companies also watch with concern the rising prices of raw materials, especially crude oil. The oil and petroleum products account for at least 18% of the costs of Hershey, Estee Lauder, Clorox, Mondelez and Church & Dwight. Among the other consumer goods, companies that spend considerable money on oil are 3M, Haagen-Dazs, General Mills and JM Smucker. Some of the executives of these companies have warned recently that they are already struggling because of the higher cost of raw materials, especially steel and aluminium, which have become more expensive after President Trump’s duties.

“The oil price of 70 USD just boosts pressure”, said the CEO of Whirlpool, Marc Bitzer. Higher oil prices may be a double problem for consumer goods companies. Their costs will rise, while Americans will have less disposable income to spend in stores as they will face higher gasoline prices.

The airlines are also preparing for higher fuel costs. The US Airways CEO Doug Parker said on April 26 that oil prices rose 60% over last summer. “This is a big increase in a short time”, warned he, adding that it would have a “material” impact on all airlines.

The good news is that many big companies, especially airlines, use hedging strategies to take advantage of energy prices when they are low. This means that the painful consequences of higher prices may not be felt immediately.

Other companies should be able to cope with higher energy costs, especially because the US and world economies are stable. The unemployment in the US fell below 4% in April for the first time since 2000.

The rise in oil prices has been stimulated by a number of factors, including strong demand and declining yields from Russia and OPEC member countries.

Recently, the oil market is boosted by geopolitical factors such as declining yields in Venezuela and expectations that Trump will impose sanctions again on Iran, which were justified this week.

In the long run, rising oil prices may be curbed by two major factors. First, oil traders will watch closely how quickly shale gas companies in the United States will react to a 70 USD oil price with increased production. A healthy dose of new American extraction can cool the market.

© Finance Apprise News



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