Oil price doom and gloom is keeping International Monetary Fund director Christine Lagarde awake at night.
The myth that low oil prices are always a positive for the economy is being shattered with fear that the crash in oil could bring down the economies of producing nations, big oil companies and the global economy.
Standard & Poor’s added more fear to the market when it lowered its rating on Royal Dutch Shell. They also said they see a significant likelihood of downgrades for several Europe-based integrated oil and gas majors in the next weeks, according to Blomberg News.
"We lowered our ratings on Royal Dutch Shell Plc to ’A+/A-1’ from ’AA-/A-1+’ and placed the long-term rating on CreditWatch with negative implications," S&P said in an e-mailed statement. "We also placed on CreditWatch negative our ratings on BP Plc, Eni SpA, Repsol S.A., Statoil ASA, Statoil Forsikring AS, Statoil US Holdings Inc., and Total S.A."
S&P’s moves come after the ratings agency lowered its oil price assumption on Jan. 12 for Brent crude down to $40.00 a barrel for 2016. The 52% average price drop in 2015 will not be matched by most companies’ cost and spending reductions, according to the statement. "We now believe many major oil and gas companies’ current and prospective core debt coverage metrics are likely to remain below our rating guidelines for two or three years as the industry adjusts to lower prices," S&P analysts said in the report.
Oil prices are hurting, big and small. BP reported its worst loss in 20 years. On Tuesday, BP reported an annual loss of $6.5 billion in 2015. BP's net income in the fourth quarter of 2015 came in at $196 million, lower than expectations of $730 million. Not only that, they announced another 3,000 job cuts and the possibility of 4,000 more next year; that is on top of the 4,000 job cuts that were previously announced.
The company also said it intends to cut a further 3,000 jobs from its refining and marketing arm by the end of 2017. This is in addition to its January announcement of 4,000 job cuts from its exploration and production division this year.
Is the Federal Reserve worried? Federal Reserve Vice Chairman Stanley Fischer said Monday, "It isn't yet clear how recent volatility in global financial markets will affect the U.S. economy. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. Apparently the oil price drop is not keeping Mr. Fischer up at night and that did not help oil out either.
Crude oil is also preparing for another oil inventory build this week. Bloomberg reports supplies should rise by 3.75 million barrels.