Local business to benefit from cheaper oil

International Energy Agency cuts its 2007 outlook for energy prices.

oil tanker 88 298 (photo credit: Ariel Jerozolimski)
oil tanker 88 298
(photo credit: Ariel Jerozolimski)
Israeli companies in traditional industry are expected to see their profitability lifted by the sharp decline in oil prices, which has led the International Energy Agency to cut its 2007 outlook for energy prices. "The fall in oil prices was largely a reflection of the warmer-than-expected winter in the US and Europe, which has reduced the demand for winter fuel oil," said Ron Eichel, head strategist for global markets at IBI investment house. "The recent fall in crude oil prices of 13 percent from the beginning of the year and 32% from its height last summer, is expected to lead to a significant change in the activity and profitability of many Israeli companies." IBI analysts noted that the US winter was expected to be remembered in the oil futures market as the warmest winter in years. The slump in demand for heating oil this week dragged down the price of futures on crude to a 20-month low of just above $50 per barrel compared with $79 last summer. Usually January is the coldest month, in the northern hemisphere. Meanwhile, early Thursday, the International Energy Agency cut its global oil product demand growth forecasts for 2006 and 2007, as a result of mild weather, adjustments to US GDP assumptions and lower demand in the former Soviet Union countries. The revised outlook by the IEA is demand growth of 0.9% for 2006 and 1.6% for 2007, a cut of 120,000 barrels a day for 2006 and 160,000 barrels for 2007. Among the Israeli companies expected to profiting from the drop in oil prices as a result of lower energy and transportation costs are Zim Integrated Shipping Services, Israel Chemicals, the plastics industry, paper companies, petrochemical companies and El Al. "The fall in oil prices used in airplanes sharply lowers the cost of a flight" said IBI referring to El Al in a research note. "The change of $1 in the oil price translates into a change of about $8 million in oil expenses of the company." Similarly, Richard Gussow, senior analyst at Excellence Nessuah, expected the profitability of companies such as Makteshim Agam and Israel Chemicals to improve as a result of lower oil prices. "Lower energy prices translate, for example, into lower shipping costs for these companies, which in turn is expected to positively affect their profitability," said Gussow. "But, we will see the impact in a lag of about three quarters - that is in the fourth quarter of this year or first quarter of 2008." Among the Israeli companies that will be hurt by the fall in oil prices are petrol station companies such the Delek group, Paz Industries, Dor Alon and Granit Hacarmel.