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ANALYSIS

Brent is likely to average $52 per barrel in 2015, says the report.

V-shaped recovery in oil prices ‘unlikely’

WASHINGTON, March 24, 2015

A V-shaped recovery in oil prices is unlikely and Brent will average $52 per barrel in 2015 and $58 per barrel in 2016, a report said.

In the past 15 years, the global economy was defined by rising commodity prices, zero interest rate policy, and a weak US dollar, added the "BofA Global Energy Weekly – “Oil at war with the dollar” report from Bank of America (BofA) Merrill Lynch Global Research.

This cycle has now gone into reverse with a decelerating industrial economy in China and the rise of US shale. As US employment picks up, Europe and Japan fight secular stagnation, said the report authored by the Global Commodities Team at BoAML.

“The observable outcome is monetary policy divergence and a strong USD. Meanwhile commodity markets face surpluses after years of excess investment as EMs face a higher Fed funds rate cycle. This combination of a stronger USD, a slowing China, and falling commodity prices is not going away anytime soon.

“As the money runs dry and governance issues across EMs spring up, expect global oil demand to stay soft,” the report said.

On the supply side, commodity producers remain engaged in a price war in markets like thermal coal, iron ore, copper, or even oil. So are currencies driving commodity prices, or is the collapse in the commodity complex driving the USD stronger?

“A bit of both, in our view. Our research shows that major thermal coal consuming country currencies like the euro, the Japanese yen, or the Chinese yuan generally lead thermal coal prices.

“But equally coal prices tend to lead movements in the currencies of coal exporters like the IDR, the AUD, or the ZAR. After all, thermal coal is not big enough a market to impact the European economy but it can surely have a major effect on the South African economy. In contrast, the link between oil and the USD is a bit more complex, as crude price changes can impact major economies.

Can oil and the strong USD curb US shale output?

“We find that oil generally Granger Causes currency moves across oil exporters. As such, the recent collapse in oil prices has had a meaningful effect on several global currencies.

“In turn, the stronger US dollar is pushing shale producers up in the global oil cost curve, and bringing down the global cost structure. Also, monetary policy divergence in developed markets (DMs) is exacerbating the move in oil by lowering the equilibrium price of oil for the world.

“After all, global GDP in US dollar is set to compress by $2 trillion this year due to the strong dollar run. True, India may follow China and save the day for commodities by absorbing rising volumes. But the thermal coal market shows that India won't provide a hard US dollar price floor,” the report said. – TradeArabia News Service




Tags: Brent | Dollar | Oil Prices | GDP |

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