But, while the geopolitical issues have not gone away, their impact on the outlook for oil prices has waned considerably, subsumed by worries about the slowdown in growth within China and the implications of the end of quantitative easing.
And, while there are some that worry that the drop in oil prices belies are more fragile recovery than markets are pricing in, most see it as a supply side driven story, that has benefitted from the stronger dollar.
JP Morgan Asset Management Global Market Strategist Alex Dryden is one of those. He says, not only can the lower oil prices help boost profit margins in the US and Europe, it will likely be a shot in the arm for a number of developed and developing economies.
And, he adds, while there is an argument to be had that the fall in oil prices is “the first canary to stop singing in the coalmine, signaling that global demand is weaker than first thought and we could be in for a global slowdown. We don’t believe this is the case and that actually low oil prices are a product of over-supply from OPEC member states such as Libya, Iraq and Saudi Arabia and not the first warning of an approaching slowdown.”
Russ Koesterich, global CIO at BlackRock adds another reason to the mix, the stronger dollar.
“Since oil is traded in U.S. dollars, when the dollar moves higher, oil prices tend to fall. This is exactly what has been happening.”
The third mitigating factor is the growth in shale gas production, particularly in the US.
Even the International Energy Agency believes oil prices have entered a ‘new era’ characterised by lower Chinese growth and higher US Shale production. According to Reuters, the IEA said in its latest monthly report out on Friday, that “supply/demand balances suggest that the price rout has yet to run its course” and that, barring any new supply disruption, “downward price pressures could build further in the first half of 2015.”
Lower for longer
If it is indeed the case that oil prices are likely to stay lower for longer, the implications are, as with all commodities, very different for consumers and producers. But, they also open up interesting opportunities for investors.
One way to look at it, as Goldman Sachs does in a note out on Friday, is through a 2×2 matrix, with emerging and developed markets on the one axis and importers and exporters on the other.
“Globally, we find that a 20% decrease in oil prices is worth about 45 basis points to real GDP growth, with EM importers as the biggest beneficiaries, followed by DM importers and even DM exporters, while real GDP growth for EM exporters declines. Inflation tends to decline generally. And current account adjustments are largest and negative for EM exporters, with some modest improvement for EM importers.
For both Dryden and Goldman Sachs emerging emerging market oil-exporters are the least likely markets to perform in the current environment, while emerging market importers of oil could see as much as a 100 basis point jump in GDP growth in response to a 20% drop in oil prices. Developed market exporters and importers should see a more modest jump of around 70 basis points on the basis of a 20% decline.
There are, however, a few other notes of caution, as well.
“The low oil prices put pressure on the US shale producers who are only competitive with prices around $90-$100 a barrel due to the large levels of debt they’ve taken on since 2010 to fuel the shale boom. These low oil prices do have the potential to cause defaults in the US high yield industry,” Dryden says.
As with everything, when it comes to the impact of falling oil prices, there are winners and losers, but this time it would seem, for the moment, the winners are outweighing the losers.
