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How Oil Price Drops Could Impact Housing Construction

by Trey Garrison

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Tumbling oil prices have led Moody’s Investors Service to lower its pricing assumptions for the two benchmark crude oils, European Brent and West Texas Intermediate, the rating agency said in recent comments that also looked at how a sustained period of lower oil prices would affect construction, among numerous other industries.

Industries for which fuel is a direct and significant cost will see a positive effect from lower oil prices, as will consumer-dependent businesses more generally, because lower gasoline prices mean consumers will have more cash to spend on other items, a client note from Moody’s said. But oil and gas exploration and production companies, as well as the companies that supply them, will be hurt by lower crude prices.

“U.S. building materials companies that produce aggregates, ready-mixed concrete and cement will benefit moderately from lower oil prices in 2015,” Moody’s analysts wrote. “Costs associated with transporting materials will decline with diesel costs, but these companies will also benefit from broader economic gains from higher consumer consumption and healthier state and national budgets.”

For homebuilders, there is no direct correlation between falling gasoline prices and increased homebuying, but lower prices will help strengthen U.S. consumer confidence.

Moody’s revised its assumptions for average spot prices for Brent crude to $55 per barrel through 2015, $65 per barrel in 2016 and $80 in the medium term, and for WTI crude to $52 per barrel in 2015, $62 per barrel in 2016 and $75 in the medium term.

“At the start of 2015, crude prices of about $50 per barrel reflected factors including growing non-OPEC supply, supply outpacing demand worldwide and Saudi Arabia’s decision not to keep acting as OPEC’s swing producer,” said Steve Wood, Moody’s managing director. “While we see no catalysts that would change the supply-demand equation in the near term, our long-term oil price assumptions reflect our view that prices will eventually rebound.”

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