Global economy: Slipping on oil again? – Danske Bank

FXStreet (Delhi) – Chief Analyst, Allan von Mehren at Danske Bank, suggests that the main event over the past week has been another slide in oil prices, taking them to levels not seen since the financial crisis in 2008.

Key Quotes

“Once again, oil prices surprised by falling even further below what is deemed sustainable longer term where an equilibrium price is seen as closer to USD60. However, the problem with oversupply short term due to weak demand from China and so far a limited supply response is keeping downward pressure on prices.”

“The main driver for this week’s push lower was the lack of supply response from OPEC at its meeting. There is clearly a risk we could see a further slide short term. However, we continue to expect a gradual return to equilibrium prices over the coming year as production moves down in non-OPEC countries in response to a sharp decline in investment activity.”

“A further decline in oil prices is currently the main risk to our forecasts for growth as well as inflation. While lower oil prices are normally a positive thing for global growth, this is no longer the case, in our view. Rather, lower oil prices increase tail risks for the global economy as they make a bad situation even worse for countries such as Russia and Brazil.”

“The decline in oil is accompanied by a drop in industrial metal prices as well, adding to the pain for commodity exporters. The drop also increases the risk of more stories of big commodity companies having problems, as was the case with Glencore earlier this year.”

“The stress from lower oil prices is clearly visible in US high yields spreads where the energy sector constitutes just below 20% of the market. Lower oil prices are not all bad, though. For consumers in both the US and euro area, this will add further support. It works as a significant tax cut to consumers, thus underpinning overall growth.”

“Clearly, the decline in oil prices creates downside risks for our inflation forecasts. Note, though, that even with unchanged oil prices, inflation is likely to move higher over the coming year, with a big part of the move coming in the next couple of months.”

Chief Analyst, Allan von Mehren at Danske Bank, suggests that the main event over the past week has been another slide in oil prices, taking them to levels not seen since the financial crisis in 2008.

(Market News Provided by FXstreet)