We believe prices will remain volatile in the short term, before a possible oil glut becomes an issue toward year’s end.The increase in prices that followed President Trump’s 22 April decision to end waivers on Iranian oil imports did not last, with Brent prices falling from almost USD75 on 24 April to below USD70. Nonetheless, we continue to see heightened risk of oil price spikes above USD80 for Brent in the short-term.Trump’s recent threat to increase US tariffs on Chinese imports could shake global growth if implemented and, as a result, weaken oil demand. But in all eventualities, the most likely consequence is higher oil price volatility in the short term.However, over the longer term, the major risk surrounding the oil market could be a supply glut. When the new Permian pipelinesRead More »
Articles by Jean-Pierre Durante
Recent data suggest the downturn in the world economy is bottoming out after a prolonged period of deterioration. We expect the world economy to expand by 3.3% this year.At its Spring Meeting, the International Monetary Fund (IMF) revised downward its 2019 global growth forecast from 3.5% to 3.3% (the same as our own forecast). The IMF left its estimate for 2020 growth unchanged at 3.6%As global growth probably slowed to 3.2% in the second half of 2018, a 3.3% growth estimate for 2019 implies that growth stabilises in H1 and firms up in H2. The latest news on global activity tends to confirm that the global economy is indeed beginning to regain momentum.For example, the global purchasing manager index (PMI) for manufacturing stabilised in March after 10 months of deterioration in a row.Read More »
Increased US export capacity would probably force OPEC+ to change its current tactics.
After last year’s collapse, oil prices have found support since the beginning of this year for several reasons. At this stage, the main question is whether the recent surge in prices is sustainable or whether we will see renewed oil price volatility, with the possibility of a repeat of 2018.
The recent release of the International Energy Agency’s annual report is an occasion to answer this question and to reassess prospects for global oil supply and demand.
Global oil demand is expected to increase by 7 million barrels per day (mbd) between 2018 and 2024. Peak oil is still far off.
In 2019, oil will be supported by steady demand
Increased US export capacity would probably force OPEC+ to change its current tactics.After last year’s collapse, oil prices have found support since the beginning of this year for several reasons. At this stage, the main question is whether the recent surge in prices is sustainable or whether we will see renewed oil price volatility, with the possibility of a repeat of 2018.The recent release of the International Energy Agency’s annual report is an occasion to answer this question and to reassess prospects for global oil supply and demand.Global oil demand is expected to increase by 7 million barrels per day (mbd) between 2018 and 2024. Peak oil is still far off.In 2019, oil will be supported by steady demand from emerging economies and a stronger-than-expected uptick in demand fromRead More »
With declining manufacturing sentiment and recent downward revisions to our US and euro area GDP forecasts, we have revised down our world real GDP growth forecast for 2019. A US-China trade agreement will be key to avoiding further growth deterioration. After recent downward revisions to our US and euro area GDP forecasts and against a backdrop of declining global manufacturing sentiment, we have revised our world real GDP growth forecast for 2019 to 3.3% from 3.5% previously.Manufacturing sentiment in all regions deteriorated in February, with the exception of emerging economies, where sentiment recorded a small rebound. Deterioration in sentiment is progressively translating into a marked downturn in hard data. International trade contracted for the second month in a row at the endRead More »
Brent price finds support between USD60 and USD70Increased pressure from President Trump on the Saudis to halt oil production cuts last week had only a temporary impact. Brent prices are currently being underpinned by several factors, including hopes of a US-China trade deal and OPEC+ production cuts, in particular. The Saudis have been aggressively cutting their production recently. With output of 10.1m barrels/day (mbd) in February, they are already below their 10.3mbd agreed target. In so doing, they are fully exploiting a window of opportunity, as US oil supply response capacity is capped due to current pipeline bottlenecks.This context offers support for the Brent price to navigate in the USD60-70 corridor. H2 2019 is likely to prove less supportive for oil prices, as increasedRead More »
With further deterioration in the global manufacturing Purchasing Manager’s Index (PMI) to 50.7 in January, the global economy is flirting with recession.January’s deterioration in sentiment was widespread, with the notable exception of the US. However, it is possible that January pessimism was largely caused by December’s poor financial markets. If this is indeed the case, it is likely that we will see a bounce in sentiment in the months ahead, following January’s rebound in markets.The latest global activity hard data were also poor. International trade contracted in November in large part due to a marked deterioration in Asian trade, which had recently been the last remaining pillar of trade expansion.The trade dispute first knocked sentiment but is now also progressivelyRead More »
An extension of the December agreement to cut production, plus a slight increase in demand, could potentially bring the oil market into balance this year.Global oil supply is undergoing a structural shift. The US oil industry is growing in importance relative to the OPEC. As a result increased production from non-OPEC producers more than compensated for the output collapse among important OPEC producers such as Iran and Venezuela in 2018.Slowing global growth, and new US pipelines facilities in H2 2019, as well as the diminished importance of OPEC, have raised concerns around a potential oil glut. At the same time, we believe that financial markets may be overestimating the risks of a global recession. Moreover, lower oil prices – prices were between 14% and 18% lower in January thanRead More »
Oil prices are caught between concerns that trade disputes will dent demand, and the risk of supply shortages due to production shortfalls and capacity constraints. We think that these combined factors justify our estimated fair value for oil.In light of the OPEC + Russia decision to increase output, oil prices declined from the end-June to mid- August. This decline is not limited to oil: all commodities have been affected. Industrial metals declined by 12%, and non-energy commodities by 5%, as fears rose that international trade disputes will dent global demand for commodities.But we believe that these concerns are exaggerated. For one, tariffs implemented so far are expected to have a mere 0.1 % impact on world GDP growth. Instead, we are sticking to the view that the oil market isRead More »
We are now very close to the neutral rate of interest in the US, meaning Fed policy is ceasing to be expansionary.After seven quarter-point rate hikes in the US since the end of 2015, we reckon we are close to a neutral rate of interest – the rate of interest consistent with trend growth, stable prices and full employment. We calculate that the current neutral rate is 2.1%, compared with a Fed funds rate of 2.0%.A neutral rate of 2.1% is considerably lower than the 4.4% rate that prevailed before the global financial crisis, underlining that event’s enduring impact. Only a lasting period (which we think unlikely) of sustained growth and inflation would push the neutral rate back up to pre-crisis levels. Instead, in our baseline scenario of decent economic growth and inflation, we expectRead More »
Spare capacity is tight, so oil prices could spike higher.The June OPEC agreement to increase oil output provided only a brief respite to oil consumers. After a temporary dip, prices started to rise steadily again, with Brent gaining USD4 per barrel and WTI more than USD7 between 22 June and 6 July. The larger rise in the West Texas Intermediate (WTI) price was due to a Canadian oil-sands outage that drained stockpiles in North America.Taking into account falling oil output in Venezuela, the risk to Iranian output from sanctions and the bottlenecks facing US production, the world supply-demand balance relies on OPEC’s spare capacity of just over 2 million barrels per day. This is a very small cushion to deal with demand and is vulnerable to supply disruption. There is a marked risk weRead More »
A slowdown in global business sentiment is not too worrying at this stage, but further deterioration will trigger downward revisions to GDP projections.Markit’s world manufacturing purchasing managers index (PMI) dropped from 53.5 in April to 53.1 in May. All in all, the world PMI declined in four of the first five months of 2018. No region has been spared the decline in business sentiment. Nonetheless, the index is still well above the 50 threshold that separates expansion from contraction.International trade statistics are also showing early signs of deterioration, starting in advanced economies and spreading progressively to emerging ones. Sentiment deteriorated in all five BRICS economies in May (Brazil, Russia, India, China and South Africa). Moreover, sentiment in Russia and SouthRead More »
Tensions surrounding oil supplies from Iran and Venezuela are destabilising the supply/demand balance.The decision by Donald Trump to withdraw from the nuclear agreement with Iran in early May constitutes a major geopolitical shift. Iran is the world’s seventh-largest world oil producer, exporting 1.1 million barrels per day (mbd). At this stage, it is unclear how Iranian exports will be affected, but taken together with the crisis in Venezuelan oil production, it could cause significant destabilising of supply.Combining supply and demand scenarios gives us an indication of price pressures for the years to come. In our baseline scenario, one that excludes a reduction in Iranian production or further falls in Venezuelan production, we still see 2018 as a difficult year, with a 0.2mbdRead More »
On 19 April, the price of a barrel of oil reached USD69.56 for West Texas Intermediate (WTI) and reached USD75.27 for Brent, today, the highest price since 2014. Since 9 April, oil prices have been significantly above their longterm fundamental equilibrium value. Three factors explain what has happened:
Geopolitics. Between Saudi Arabia’s Prince Mohammed bin Salman visit to the US at end March, new US sanctions against Russia and western airstrikes against Syria, geopolitical developments have been to the fore in recent weeks. As a result, worries about Middle East stability have resurfaced. In particular, Iranian supply could be cut if a breakdown in the nuclear agreement leads to fresh sanctions.
Oil prices are significantly above their long-term equilibrium, but should converge towards their equilibrium in the coming months.Oil prices have surged to their highest levels since 2014 (USD69.56 for West Texas Intermediate (WTI) on 19 April and USD75.27 for Brent on 24 April ). They are now USD6 to USD9 above our calculation of their long-term fundamental price equilibrium.Three factors explain the current price premium:Geopolitics: Between Saudi Arabia’s Prince Mohammed bin Salman visit to the US at end March, new US sanctions against Russia and western airstrikes against Syria, geopolitical developments have been to the fore in recent weeks. Worries about Middle East stability have resurfaced. In particular, Iranian supply could be cut if a breakdown in the nuclear agreement leadsRead More »
The current spot price is already close to oil’s upwardly revised equilibrium price.Strong global growth, a substantial US fiscal stimulus, signs that reflation is taking hold in the US and a relatively weak US dollar all should represent a favourable environment for commodities, and for oil in particular, for the rest of this year. However, our analysis suggests that oil is now close to its long-term equilibrium price, offering limited upside potential.Now that markets have fully taken on board the impact of the latest US fiscal stimulus (which led us to revise our forecast for real global GDP growth in 2018 up from 3.7% to 3.9%), the potential for further upwards revisions is limited, in our view. In addition, recent leading indicators suggest that economic activity may have peaked in aRead More »
The same discipline shown by OPEC and Russia in 2017 will be required to support prices at their current level. After the 30 November agreement between OPEC and Russia to extend oil production cuts until the end of 2018, it is worth looking again at the balance between oil supply and demand. The most recent data indicate that without continued willingness from OPEC to limit supply, the market will be naturally tilted towards oversupply in 2018 and 2019. Non-conventional production, in particular US shale oil, is expected to continue to play an important role. Oil prices in 2018 will largely depend on OPEC members and Russia remaining disciplined enough to keep production slightly below demand. In this context, we are sticking with our forecast, based on long-term fundamentals, whichRead More »
Various factors have contributed to the oil price rally since August, but while a further short-term surge is possible the fundamental long-term equilibrium price for WTI remains USD55-USD58.Recent developments have brought noticeable changes to the outlook for the supply-demand balance. First of all, the steady decline in the value of the US dollar since the end of 2016 has been stopped. In fact, the dollar appreciated by 4% between end September and 7 November.Second, world economic activity has gained steam. In its last update, the International Monetary Fund revised its world GDP growth forecast up to 3.6% in 2017 and 3.7% in 2018. Third, US oil production has hit some obstacles. The number of rigs has declined after an impressive 143% increase in in the 16 months to August 2017. As aRead More »
Analysis of the ‘neutral’ rate of interest suggests there is considerable market complacency surrounding the potential for further hikes in the Fed funds rate.Janet Yellen refers regularly to the concept of ‘neutral’ interest rate as a reference point for monetary policy. The neutral rate is very helpful in determining whether the Fed’s monetary stance is relaxed or restrictive and can also provide insight into the Fed’s next possible moves.The financial crisis has had a considerable impact on the neutral rate. It is currently estimated at 2.6% and has not been showing many signs of bouncing back towards pre-crisis levels (4.5%). But this could change.The ‘neutral’ rate can be understood as the interest rate expected to prevail when economic growth is in line with long-term potential prices are stable, and full employment has been achieved. Historically, the Fed funds rate tends to hover around the neutral rate, although gaps can open up between the two, most notable in 2001-2006, when the Fed funds rate was much lower than the neutral rate.Pictet Wealth Management’s baseline scenario is that US GDP will grow by 2.2% in 2017 and 2.3% in 2018, and that headline inflation will reach 2.4% in 2017 and 2.5% in 2018.Read More »
Having faltered this year, predictions of prices above USD60/b in 2017 appear premature.The market was highly optimistic about oil price at the beginning of this year, with oil analysts expecting that prices would have recovered to USD60-65 by now. These hopes have clearly been dashed, as WTI prices have fluctuated in a range of USD45-55 since January 1.We have been much less optimistic than the market, based on our own modelling of the equilibrium oil price, which has proved a reliable indicator of oil price trends in the past. The equilibrium oil price has informed our forecast over the past two years that spot oil prices would remain close to USD50 per barrel. In addition, the current price (USD48.6/b for the spot WTI on 16 May) is very close to the equilibrium price of USD44/b Taking into account our economic scenario (world GDP growth of 3.3% in 2017 and 3.6% in 2018, US inflation of 2.4% in 2017), the oil price equilibrium may shift only slightly higher, to USD51/b over the next 12 months, assuming the trade-weighted US dollar rate remains unchanged.For the price to go higher, we would need much stronger economic growth or a weaker US dollar. If the US dollar were to weaken by 10% in real trade-weighted terms over the coming 12 months (not our core scenario), then equilibrium oil prices could rise to USD59/b.Read More »
Using in-house modelling, we are able to assess the broad consequences of a much-mooted fiscal stimulus on the US economy and the main asset classes.Our core scenario for the US is for real GDP growth of 2% in 2017 and 2.3% in 2018. This assumes that fiscal policy will be only modestly stimulative. However, with the election of Donald Trump as US president, the possibility of a radical change in public policy has increased markedly—possibilities, which enter into our alternative scenarios for the US economy, range from a large fiscal stimulus to trade protectionism. We use our in-house models to assess the potential impact of the first alternative scenario, a substantial fiscal stimulus.We estimate that Trump’s proposal to cut the top marginal rate of corporate tax from 35% to 20% could be very effective in boosting GDP growth. The changes would likely take time to implement, limiting their impact in 2017. But in 2018, US GDP could jump to 2.9%. The main driver would be increased investment.Trump is also considering reducing taxes on labour. The economic impact of a 10 percentage point cut in the average tax on labour would be less impressive, although still significant, boosting real GDP growth in the US to 2.7% in 2018. A combination of corporate and labour tax cuts would be most effective, raising GDP growth to 3.Read More »
Aggregate purchasing manager indices are pointing to upticks in growth and inflation in developed markets in line with our central scenario, but emerging markets are lagging.Global sentiment improved slightly in November, to 52.1 from 52.0 in October, according to Markit’s global Purchasing Manager Index (PMI). This is the third monthly improvement in a row. One has to look back to August 2014 to find a higher level.Advanced economies are among the more upbeat. Business sentiment in November was highest in the European Union (ex euro area), closely followed by the euro area and the US where sentiment has improved markedly in the last three months, most notably after the presidential election on 8 November.Sentiment in emerging countries continues to lag sentiment in developed markets, and, according to our own aggregate of Markit figures, in November was only barely above the 50 threshold that divides expansion from contraction. In China, apart from a slight dip in November, sentiment has increased significantly since June. Russia has also recorded an impressive recovery, but other emerging-market heavyweights appear less optimistic. Sentiment in India has probably been hurt by the government’s decision to withdraw banknotes from circulation, while sentiment in South Korea has been dented by the scandal involving President Park Geun-hye.Read More »
At current levels, the oil price is close to equilibrium, with little in the fundamentals to suggest a sustained move higher in prices in the coming months There were sharp movements in the price over the summer, and further volatility is likely in the coming months. WTI oil prices dropped around 25% between June and early August. Prices subsequently rallied, rising by around 20% to close to USD50/b, before dipping again at the close of August. High inventories played a key role in pushing prices down between June and early August, as US crude oil stocks reached record levels. But dollar weakness and signs of a possible OPEC deal then supported a rally. The slip in prices at end-August reflects worries about demand, as well as ongoing concerns about inventory levels.Overall, these sharp fluctuations suggest that the market is still finding a new equilibrium, as it seeks to calibrate the continuing impact of US unconventionals (shale oil). So signs of shifts in supply and demand can have a sizeable impact. This may well presage further abrupt price movements. However, our macro-econometric model—based on the long-term relationship between the oil price, global economic growth and the US dollar, point to a current equilibrium level of around USD49/b at present, not far from where it is.Read More »
Macroview In-house simulations of growth impact match those of the ECB PWM has on-boarded the models used in the major central banks to tell us the cost of Brexit for the euro area economy. Using the same models used in major central banks gives our asset allocation policy important advantages. We have the same diagnosis of the situation as the monetary authorities and we are able to enter their mind-set. In the case of Brexit, the challenge has been how to simulate what is essentially a political shock, and how to translate that shock into a proper economic or financial variable. Past events have been helpful in finding a way to do this. The 1992 Exchange Rate Mechanism (ERM) crisis offered some similarities and insights.Simulations using modelling tell us that the euro area’s real GDP will be reduced by 0.5% after eight to 12 quarters. This is very close to estimates for the cost of Brexit produced by the European Central Bank. This is no coincidence, as we use the latest-generation DSGE model, which has exactly the same characteristics as the models used by the ECB. Economic models such as the DSGE have been workhorses for academics and central bankers alike. These models aim to reproduce the behaviour of different economic agents when confronted with shocks and uncertainty, as well as the interactions between agents.Read More »
On 23 June, the British will decide whether to stay in the European Union or not. Using econometric models, we can attempt to measure the impact a vote to leave the EU would have on global and European growth, as well as on equities and bonds
Read full report here
The relatively small size of the UK economy (2.4% of world GDP) means the global impact of Brexit would be almost negligible in strictly economic terms, according to global-VAR models of the kind used by central banks to assess the effect of specific events on the global economy. Unsurprisingly, the most exposed countries would be the UK’s European neighbours, whereas countries outside Europe are all largely uncorrelated from events in the UK.
According to the proprietary Pictet Global Impact Macro-Financial (P-GIM) model, 20 basis points (bps) could be knocked from euro area GDP growth in both 2016 and 2017 should the UK vote to leave the EU. According to this model, while household consumption would be almost unaffected by Brexit, investment would bear the brunt of the shock, with 60 bps knocked from the projected growth in investment spending in 2016 and 80 bps in 2017. So the impact of Brexit on the euro area economy would essentially be propagated through the investment channel.
Despite the lowering of global economic prospects, oil prices could rise to USD 50/b by early 2017.
On April 12, the International Monetary Fund (IMF) published its World Economic Outlook survey, containing its economic forecasts for 2016 and 2017. The IMF revised downward its global growth forecast for 2016 by 0.2%.
In a recent post we presented our macro-econometric model, which showed a stable long-term relationship between oil price, global economic growth and the US dollar. Based on this relationship and the IMF’s latest growth forecast, the oil price could rise towards USD 50/barrel in 2017.
Slower economic growth in 2016 and 2017
Ahead of the IMF/World Bank spring gathering of the world’s top economic policymakers in Washington on April 15, the IMF lowered its world GDP growth forecast from 3.4% to 3.2% for 2016 and from 3.6% to 3.5% for 2017. The IMF justified the growth downgrade by mentioning several adverse factors such as the slowdown and rebalancing in China, further declines in commodity prices, falls in the volume of cross-border investment and trade, declining capital flows to emerging markets and geopolitical tensions.
Does lower economic growth mean lower oil price?
Lower global economic growth in 2016 could mean lower demand for energy, including oil. Our model shows that a decline in world growth from 3.4% to 3.
From a low point of less than $30 per barrel in mid-February, oil prices had risen to over $40 by mid-March. If maintained, this rise will have an obvious impact on growth and inflation on both sides of the Atlantic. The use of a sophisticated macro-econometric model provides an insight into just how large the impact might be.
Although oil prices have risen, the huge accumulation of oil stocks as a result of overproduction should serve as a brake on oil prices this year and next. Nevertheless, fundamentals are progressively reasserting themselves, enabling us to envisage a time when crude oil arrives at a “fair value” price per barrel.
The use of a sophistical macro-econometric model that takes into account variations in the rate of the trade-weighted dollar and a wide variety of economic indicators enables one to arrive at what this ¨fair value” price for crude oil might be in the absence of geopolitical risk.
Should global growth reach 3.4% this year (as per the International Monetary Fund’s January forecast) and should the trade-weighted value of the US dollar remain at current levels, then the model indicates that the “fair value” for crude oil would be US$49 per barrel. Should the real trade-weighted rate for the dollar rise by 10% and global growth still come in at 3.4%, then the fair-value price of oil would be US$35.