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Oil prices drop hitting emerging markets and commodity producers hard - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 22, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Marc Chandler, SVP at BBH, suggests that the price of energy has far-reaching economic impact and although there is the risk of a weather-shock or a geo-political disruption in supply, the base case is for oil output to increase over demand in the first half of 2016.

    Key Quotes

    “We anticipate that the turn of the calendar will not alleviate the pressure that has bedevilled commodity producers and many emerging market economies. The slow, mostly domestic driven growth of the high income countries and notably the transition in China dampens demand growth.”

    “High fixed cost producers discover powerful incentives to produce at a loss even if it weighs on prices further. When prices are high, countries do not recognize the incentives to diversify away from commodity dependency. When prices are low, they cannot afford to, and this is how the cycle plays out, again.”

    “The price of energy has far-reaching economic impact. The drop in energy prices provided economic support in some sectors, even as it weakened energy sector earnings, slashed investment, and undermined share performance. Benchmarks that exclude the energy sector are being developed and will likely be adopted in 2016.”

    “The decline in non-OPEC output in the coming months, half of which may come from the US, will likely be offset by increased Iranian and Libyan output. By its reckoning, OPEC output in November was about 900k barrels a day more than it estimates 2016 demand for its product.”

    “Although there is the risk of a weather-shock or a geo-political disruption in supply, the base case is for oil output to increase over demand in the first half of 2016. Inventory levels may grow relative to seasonal averages. Downward pressure is likely to continue. The charts warn that the price of light sweet crude oil could drop into the $20-$30 a barrel region. This could force a more rapid industry restructuring and make for a different OPEC meeting a year from now.”

    “Many emerging market economies have been hit by a painful negative terms of trade shock. The price of their products (commodities) have fallen faster than what is typically imported (manufactured goods and capital equipment). At the same time, global investors generally appear to be pulling funds from the emerging markets as an asset class. Additional pressure is coming from the unwinding of the currency mismatch that many emerging market countries and companies took on by borrowing cheap dollars in the past.”

    “These are significant economic challenges. Even with strong, decisive and responsive leadership, the waters are difficult to navigate. Weak, ineffective, or incompetent and corrupt leadership exacerbate the economic challenges. It accelerates capital flight and aggravates both inflation and recession, which in turn leaves officials choices among poor alternatives. Investors watch macroeconomic indicators closely. We are noting that especially in the current environment, political considerations also warrant close monitoring.”
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