Higher oil price is need the need of the hour

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 3, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Oil has price has dropped almost 70 per cent since its June 2014 peak raising fears that it might lead to an economic crisis soon given that global economic outlook is dependent on commodity priced particularly oil price to a significant extent. Some economists fear recession is just around the corner.

    The drop in revenue for the oil exporters have resulted in huge deficit in these export dependent countries. World’s consumer sentiment and investor appetite is being hurt by the slump in oil price which had dropped below the $30 per barrel threshold last month. Oil price continues to fall hovering around $33 per barrel. As Gian Maria Milesi-Ferretti, the IMF’s deputy director of research points out that owing to the depressed prices the oil exporters “have to cut spending significantly, and this will have an impact on economic growth.”
    Several companies have blamed this ongoing rout for their poor sales. Apple Inc., for example, stated that the fall in their last quarter sales volume was largely due to the lower economic growth in certain resource dependent countries.

    Low oil price has hit the energy companies whose declining profits have compelled them to lay off people, cut down on investment and suspend capital-intensive projects BP’s annual revenue fell in 2015 was worst in 20 years causing its share to drop around 9 per cent.
    The performance of the emerging economies today is far more relevant today than it was 15 or 25 years ago when oil price slump was last seen. Apart from China and India the other emerging countries are mostly oil and commodities rich. Hence, an oil price slump is bound to impact their economic growth which in turn will impact the global outlook as these emerging economies currently account for about 40 percent of global GDP, which according to the IMF is double their share in 1990.

    Also, production has increased manifold owing to the rise of shale producers as well as OPEC’s adamant policy of pumping record volumes to defend market share. OPEC and other non-OPEC oil producers such as Russia has not been able to reach agreement so far on production cut.
    The continuous fall in oil price has once again raised fears of sovereign default which was deemed to have been long forgotten. Venezuela, one of the world’s top 10 oil exporters is currently seen as a defaulter given that the yield for its bonds maturing in 2022 drooped below 10 percent in 2013. Azerbaijan had to give up its dollar peg in the wake of the oil slump. International lenders are coordinating with Azerbaijan and Nigeria to provide emergency loans.

    Slowdown in China which is the largest consumer of energy has hit oil demand creating further downward pressure on oil. The mild weather in the US and other European countries have lowered demand for heating oil thereby impacting overall demand and in the process prices.

    There are contrasting views doing rounds as well. The U.S. Federal Reserve Bank of Dallas, for example, said in a research paper that that a drop in oil prices brought about by rising supply will actually boost global growth by up to 0.4 percentage points. The paper noted “This is mainly due to an increase in spending by oil-importing countries, which exceeds the decline in expenditure by oil exporters”. BlackRock Inc. Chief Executive Officer Laurence D. Fink also thinks on similar lines. He adds “The reality is 4 billion human beings are going to have cheaper energy, cheaper heating, they’re going to have more disposable income,” This he believes will “re-accelerate the global economy”.

    However, the current trend shows that though people are saving more due to drop in energy price they are not exactly spending it. The price environment thus stayed depressed hurting inflation target of major central banks. Neither has oil drop led to an increase in expenditure in economies which import oil. The IMF also noted “the pickup in consumption in oil importers has so far been somewhat weaker than evidence from past episodes of oil price declines would have suggested”. It is believed that people are using the extra available cash to save or repay debts.

    The need of the hour is thus to raise oil price. Han de Jong, chief economist at ABN Amro Bank NV in Amsterdam said via Bloomberg “I never thought I would wish, let alone pray, for higher oil prices, but I am”.

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