OIL PRICES & GLOBAL ECONOMY
Oil is in the midst of one of its steepest selloffs since the financial crisis, with prices falling 16 percent since mid-June. This has the Saudis contemplating even deeper cuts in oil production to keep prices from declining any further. The world's biggest crude exporter told OPEC recently that in August it reduced output by more than 400,000 barrels a day.
It's not yet clear how well that's working. The Saudi cuts were offset in part by more oil from Iran, Iraq, and Nigeria—not to mention the continued record increase in U.S. oil production thanks to the shale boom. While prices are expected to rise slightly for international blends of crude over the next six months, domestic prices in the U.S. are forecast to be cheaper by next spring. That's not necessarily great news for oil producers, but it could be good news for consumers and the global economy.
There are two schools of thought to explain the recent crash in oil prices: too little demand and too much supply. The question is which one is having the bigger influence. While the results are the same (lower oil prices), the reason for them is equally if not more important to the global economy. Demand certainly could be stronger. A stagnant economy in Europe, slower growth in China, and flat gasoline consumption in the U.S. are all tamping down prices. According to the International Energy Agency, the growth in the world's demand for oil will be the slowest this year since 2011.
But the bigger factor appears to be on the supply side, as production growth outpaces demand. That was the case last year and is shaping up to happen again in 2014.
A new report by Andrew Kenningham, senior global economist at Capital Economics, attempts to gauge the hard-to-measure global economic boost from lower oil prices. "A $10 fall in the price of oil transfers the equivalent of 0.5 percent of world GDP from oil producers to oil consumers," he writes. That in turn will have a knock-on effect on global consumption, since consumers tend to spend more of their income than businesses. Assuming consumers spend half their savings for cheaper oil, Kenningham continues, "a $10 fall in the oil price would boost global demand by 0.2 to 0.3 percent."
This means different things for different parts of the world. In Europe, for example, where policymakers are already struggling with deflation, lower oil prices will only make the European Central Bank's challenge harder in loosening its monetary policy to try and boost prices. It also might not be good news for some big oil-producing economies. Kenningham points out that while Russia and most of the Middle East will be able to weather lower prices, countries such as Brazil, Mexico, and Venezuela will be hit harder, "primarily because they have not been saving much of their oil windfalls."
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REUTERS - Brent crude futures LCOc1 were down 72 cents at $61.49 per barrel at 1020 GMT, having fallen by 1.5 percent on Tuesday, its largest one-day drop in a month. U.S. West Texas Intermediate (WTI) crude CLc1 was at $55.12 per barrel, down 58 cents.
BLOOMBERG - Prices dropped during the session as the International Energy Agency said the recent recovery in oil prices, coupled with milder-than-normal winter weather, is slowing demand growth. The worsening outlook for consumption dampened some of the enthusiasm that OPEC and its allies will extend supply curbs.
Global energy needs rise more slowly than in the past but still expand by 30% between today and 2040. This is the equivalent of adding another China and India to today’s global demand.
Product exports have grown significantly over the past several years and are expected to continue to grow as Russian refineries add capacity to produce more high-quality products.