Monday, 17 August 2015 09:45

Chinese Monetary Devaluation Sends Crude Oil Market Plummeting

China’s decision to devalue its currency, the yuan, to support its slowing economy and reducing exports has had a negative impact on companies and investors in other countries. Suppliers that sell to China took a lot of the fall-out. For instance, the company Freeport-McMoRan lost 12.27%. Car companies and those that sell top range items will also suffer because monetary devaluation now means that the Chinese population cannot afford to purchase more expensive products.

 

Drop in Crude Oil Value

The move also sent the price of crude oil tumbling. This is because imports of oil and other resources to the country will become more expensive. There may be fewer sales and profits will reduce, ultimately reducing the value and therefore the price of those commodities.

Light, sweet crude oil for September fell in value by 4.2% and sold for $43.39 a barrel on the New York Mercantile Exchange - the lowest price it has been since the spring of 2009. At the same time, output from countries like the United States and Russia is at an all-time high while demand has slumped – a recipe for disaster.

China’s surprise move has led stock market speculators to question whether the Chinese economy is facing a more dramatic downturn or whether the government may be worried about this trend and taken drastic action to maintain a workable economy.

Senior Market Analyst Phil Flynn, from Price Futures Group, suggested that other countries may follow suit and devalue their own currencies to allow a more competitive market.

A slump in demand caused by these monetary changes and the ensuing supply problems are the two major reasons for the crude oil crash.

How Investors can benefit from the Oil Crash

Since oil prices are now at bargain basement levels, the general public may wonder if now is a great time to buy up oil stocks and make a tidy profit? Certainly, consumers have already seen benefits. Motorists in the UK were pleased after the price of Brent Crude Oil dipped to its lowest figure in six years, causing all the major supermarkets to slash their petroleum prices. Tesco, ASDA, Sainsbury’s and Morrison’s reduced each litre of fuel by 2 pence, making their fuel around £1.03p a litre. A garage in Birmingham went one better and became one of the first motoring businesses in the UK to sell fuel for less than £1 a litre.

This may make drivers breathe a sigh of relief at the pumps, but it’s not necessarily beneficial for anyone who wants to invest in the oil industry. Oil stocks may be cheaper, making them accessible to more people, but as with any investment there is a risk of financial loss if the company with the stocks goes bankrupt during the downturn. Therefore, if an investor is new to the stock market they should think about seeking an financial advisor before they make a decision on what stocks to purchase.

On the other hand, if stocks are brought up while they are at bargain prices, then the investor doesn’t risk large amounts of his own capital.

One of the ways to determine whether the oil company you want to invest in is healthy, is to see whether they still offer dividends to people. Some companies, in response to the price crash, have stopped their dividend scheme. This is usually a sign of a poor bank balance and an indicator that the company is in financial difficulty. Dividend cuts occur due to a limited amount of funds and poorer earnings.

For instance, if a company has made less profit, they have less money in the pot in which to pay out dividends. If a company tries to obtain the funds to pay this from other sources, they may get into debt. This is why reduced or entirely stopped dividends are seen as a negative sign and make the company far less attractive to potential investors.

When looking for an oil company to invest in, the smart investor should look for companies with a reputation for paying increasing dividends. For instance, Exxon Mobil have an ongoing record of doing just that for more than two decades, as do Chevron.

Shopping around for financially secure companies before any monies are handed over can help to ensure that you get the most out of your investment.