The rolling plunge in the price of oil is arguably the most important economic event of the year, ensuring a disinflationary environment in major global economies while distributing income from energy producing heavyweights to consumers and spurring flagging global growth.
A few months ago when this article appeared in Business Spectator (The oil markets are flashing red, August 7), few analysts were willing to talk down the oil price. Now it’s harder to find one keen to talk up black gold’s prospects than it is one eager to sell the short story. And while there are indeed plenty of reasons to suggest the road ahead is littered with pain for oil suppliers and joy for consumers around the world, there are at least five reasons for hope among producers.
According to three US-based oil market experts, these are the factors to watch in 2015:
An erroneous assumption was made earlier in the year that geopolitical problems were not being factored in by the market as oil prices failed to surge as high as many tipped.
Yet, since geopolitical worries have faded, Brent has fallen from a peak of $US115 in June to just $US65 a barrel overnight, indicating how important the geopolitical factors were in keeping the price above $US100 and how quickly the worm could turn if crises flare once more.
One potential hotspot is Africa’s most populous country and largest oil supplier, Nigeria.
Speaking at an oil price forum at Columbia University this week, Helima Croft, managing director and chief commodities strategist at RBC Capital Markets, argued Nigeria was at the harshest end of the pain distribution scale among key oil suppliers and, heading into a ‘polarised’ election on February 14, open to the kind of tension that shocks supplies.
“[Nigeria] is a country that everyone should be concerned about,” she warned at the New York event.
“We’re in a situation where the country is very fractured and the only way the elite could hold itself together was literally with oil revenue.
“If there was a clear and present danger of a country that can ill-afford to have this type of revenue shock at this moment it would be Nigeria.”
Nigeria has long been a great source of both oil market supply and disruption. At its peak supply this year, it was producing about a quarter of the levels of leading OPEC nation Saudi Arabia and was knocking on the door of the world’s top 10 suppliers list.
However, it has a tragic history of coups in low oil price environments where production dries up almost at the drop of a hat and, should intense instability resurface, oil prices could receive a jolt.
Ahead of last month’s non-decision on Iran’s nuclear regime -- which left a deal on the backburner and current sanctions still in play -- noted political scientist Ian Bremmer informed Business Spectator of the prospect for an oil price bounce based on the potential for tighter sanctions (A chance for cheaper oil is slipping away, October 14).
Such fears proved unfounded as the West opted for a cautious approach to negotiations, but that could change now the Republicans have control of both houses of US Congress, according to RBC’s Croft.
“What I am most concerned about (with Iran) is what Congress will do because I think the switchover to having the Senate controlled by Republicans does move up the chances of some of those bills that have already passed the House of Representatives, which would significantly tighten the sanctions on Iran,” she explained.
“I think (a tighter oil quota) bill gets to be pain free in this kind of low price environment. This risk is underappreciated.”
Incoming Republican Senate Majority Leader Mitch McConnell has already said Iran sanction bills are near the top of his agenda and it’s not hard to see an impact on oil markets in the first half of 2015.
The unquestioned leader of OPEC, Saudi Arabia, has the power to support prices by curbing production. Its decision not to exercise this power has caused much of the recent turbulence on oil markets as investors optimistically expected a response from the Middle East nation.
But while currently suggesting it’s content for the market to find balance on its own, that could change in 2015 as pressure from allies mounts and the price potentially dips below its prediction of a $US60 floor.
“My impression is that the Saudis will withstand this, but at some point they will come back and defend oil prices, but we may not be quite there yet,” Guillermo Mondino, managing director and head of emerging markets economics and strategy at Citi, suggested.
“I think it’s fair to work on the assumption that oil prices will be higher next year than what we see today because at some point a lot of these (oil producing) countries will be brought back to try and defend prices and reduce production.”
Saudi Arabia’s ‘go stabilise yourself’ talk may change but in the meantime the potential for supply cuts largely rests on the shoulders of the US shale sector, which likely guarantees things will get worse for producers before any improvement is seen, according to Jan Stuart, global energy economist at Credit Suisse.
“(The Saudi approach) is going to take a little bit of time because the ‘go stabilise yourself’ process involves slowing production,” he explained.
“In the absence of sovereign action, we think it comes down to the industry bottling up the animal spirits, so to speak, of production growth here in America. Should all these guys behave rationally we can reduce black oil growth in America that was 1.2 million barrels a day this year to something sub 200,000 barrels a day and solve the global oil balance next year.
“The problem is that not everyone is going to behave rationally from day one forward.”
Stuart contends we will see “the beginnings of change” in US shale growth in the second quarter, but barring OPEC action or swelling geopolitical fears, there is still a lot of downside potential for crude prices in the meantime.
The four factors above are all supply-side issues, but the potential for a demand boost should not be discounted as the oil price collapse itself offers a crucial growth catalyst.
Analysis from Citi Markets suggests that oil prices averaging $US80 a barrel compared to recent levels around $US105 a barrel could offer a redistribution of income from oil producing giants to the rest of the world in the order of about 1.1 per cent of GDP.
“This is a major, major shift from a group of countries,” Citi’s Mondino noted.
“It is very focused on a small group of countries and it’s distributed broadly across the global economy. It’s 1.1 per cent from producers to consumers. Roughly speaking that’s $US900m to $US1 trillion of redistribution.”
Among key beneficiaries are Japan, the US and Europe, which could also see an oil-related lift of 0.4-0.5 per cent of GDP in the first half of 2015, according to Citi.
And with depressed oil prices also putting a dampener on inflation, central banks have the freedom to retain or -- in the case of Europe and Japan -- extend market-friendly policies, potentially leading to a further leg-up in growth that could drive a steady recovery in oil demand and prices.