Tuesday 19 March 2024
 
»
 
»
ANALYSIS

What if oil stays below $50 until 2020?

DUBAI, February 10, 2016

What if oil prices remain stuck in a $25 to $50 per barrel range for the next 5 years? What will the world economy look like in 2020? How do different asset classes perform? Bank of America Merrill Lynch research team explores the scenario.

Even if$30 oil hurts growth in the short-run and delays a projected EM recovery, history suggests sustained low prices are actually good for growth, according to the recent report from Bank of America (BofA) Merrill Lynch Global Research titled “Global Cross-Asset Report: What if oil stays sub $50 to 2020?”.

Even then, the sharp swing in oil will surely see a large group of winners (China, India, Korea, Japan, Spain, Poland, or Holland) and a small concentrated group of losers (Saudi, Russia, Nigeria, or Canada).

A number of countries (Brazil, Indonesia, or Mexico) face a modest hit on trade balances, but corporate debt and government funding dynamics will likely remain a drag.

Ambiguous short-run effect for US, but positive long-run

In the US, the net stimulus of lower oil seems to have been close to zero for now. The collapse in capital spending by US energy companies has sliced about 0.5 per cent off of GDP growth in 2015 and households have only spent about 75 per cent of the low-price windfall. Still, the picture turns more positive longer-term, and we see a possible template in the "Great Moderation" of the late 1980s/90s as low energy costs drive up other spending.

Rates & FX markets will continue to adjust

The mixed near-term impact of lower oil is reflected in markets, as short-term negative effects dominate (currency devaluations, bad loans, falling earnings, credit defaults). Yet, there are also lingering medium-term concerns for fixed income markets, such as a shift in savings from reserve managers to private citizens, who tend to have a lower propensity to save, leading to higher equilibrium real interest rates.

Also, following the one-off oil price shock, inflation expectations in Europe and the US may rise, placing TIPS at a particular risk. Moreover, despite a short-term risk-off move, we still believe that the USD will keep appreciating against most crosses as the Fed normalizes policy.

Equity, credit markets may struggle, but US bonds hold firm

In equity markets, earnings are positively geared to oil. Lower for longer prices may thus remain a big drag until consumer balance sheets improve. The large collapse in oil capex will also act as a deflationary tug and feed into other sectors.

“But we see lower oil prices ultimately having a benign effect on global equities. In credit, HY could suffer via direct (energy) or indirect exposure to oil,” said the BofAML research team.

Provisions set aside for commodity losses could also reduce financing across levered players. Interestingly, the outlook for credit in Europe remains mixed too as ECB QE is extended, while EM corporate credit may struggle given the high exposure to energy. Still, US IG corporate bonds should benefit from muted growth and disinflationary pressures.

“To sum up, we see assets and the economy benefitting in the long-run but plenty of market turmoil in the short-run. Welcome to sub $50 oil,” BofAML concluded. – TradeArabia News Service




Tags: research | oil price |

calendarCalendar of Events

Ads