Lower Oil Prices Present Significant Opportunity For Cost Savings

Spend Matters welcomes this guest post from IHS.

The IHS oil and energy price outlook has moved downward significantly over the last several months. While Brent and West Texas Intermediate (WTI) oil prices were already softening in the second half of 2014, IHS expected a stronger price rebound in 2015 as tightening supply fundamentals help push Brent back above $60/barrel (bbl) in the first half. IHS now expects the global oil market to remain in surplus at least through the first half of 2015 as tight oil production in the United States gradually adjusts to a softer price environment. Oil prices are now expected to bottom out near $40/bbl in the second quarter, creating further buying opportunities in 2015.

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Lower oil prices will lead to dramatically lower prices for chemicals. However, the impact varies by product. Some chemical products and their derivatives are more closely associated with crude oil feedstocks than others, namely those that rely on refinery-generated raw materials. Petrochemical and plastic products that have seen the most significant downward price movement in recent months have been connected to benzene, toluene, xylene and propylene; all byproducts of crude oil refining. Others have also seen significant price declines, but to a lesser degree.

IHS

Lower oil prices do not mean lower prices for all. The US economy will benefit tremendously from lower oil prices. IHS has now lifted US GDP growth to 3.1% in 2015 from 2.7% in our fourth-quarter 2014 forecast. Falling gasoline prices and other consumer energy costs will put more money in consumers’ wallets. Real consumer spending will be a significant driver of US growth in 2015 and means stronger demand for selected goods and services in the US economy.

Transportation is one area that will benefit from the increased US demand. Lower diesel and other energy prices suggest that trucking and railroad rates will decline in 2015. However, improving demand in the US economy is propping up rates to near 1–2%. Expect some deceleration from the 3–4% growth in 2014, but the full cost savings will not be realized by transportation buyers.

Buyers should closely evaluate the cost structure of the purchased products and expect significant cost savings in the year ahead. The drop in raw material prices is broad-based, and the impact of these lower prices should extend well into the second half of 2015. That said, please keep in mind the relative strength of the US economy could reduce buyers’ leverage.

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