Crude oil .... and getting your thoughts in order

ref :- "Here's What Oil at $70 Means for the World Economy" Bloomberg Markets

Given its importance and our own fascination with the oil market over many years, it comes as a bit of a surprise to be reminded that we've focused very little on its recent journey to higher prices other than to note how its inflationary implications might affect other markets. Probably a bit remiss of us, but now we're at $70 per barrel (actually, $71.47 for WTI and $77.44 for Brent as we write), it might be a good idea to make sure we've got our head around how a new price range is likely to affect economies around the globe. Which is not to say that the oil price is bound to stay around these levels. As ever, there are arguments for expecting both a pull-back and further rises (currently rather more in vogue), and there's no guarantee whatsoever that things will pan out as the theory suggests  -- but that's markets for you.

Nevertheless, it's a worthwhile exercise to muse over the wider logical implications of any major development. BLOOMBERG are very good at the "Here's what it means..." type of article, and you should try to get hold of this one that first appeared on Wednesday.

It's not going too far out on a limb to suggest that the 18% rise in crude oil prices so far in 2018 (the rally really started in mid-2017) must be good for nations producing/exporting oil, and bad for those that consume it. That's the most obvious of no brainers, right ? Well of course, but it's not always such a binary picture and key to it is the reasons behind the move. If oil prices move sharply higher as a result an interruption to supply, that's plainly bad news for the consumers and for the world economy as a whole. But if higher prices reflect stronger demand, which in turn reflects strong global growth, that's another matter.

Notwithstanding the production cutbacks put in place by OPEC and Russia (primarily), much of the rally has been put down to the healthier of those two scenarios  --  a world economy riding a widespread and long-lasting (if not exactly dynamic) pick-up in growth prompting increased demand. But President Trump's decision to tear up the nuclear deal with Iran, to reimpose sanctions and penalize his allies if they fail to do the same paints a much less rosy picture.

1. What does it mean for global growth ?

If you believe that European growth is genuinely slowing up and that the softer numbers of late are more than just a blip, then Europe (as large net importers) must be vulnerable to higher prices. China is the biggest importer of all, and although it has a strong trading relationship with Iran and will not be overly worried by threats of US sanctions, it can expect inflation to rise further  --  it is already forecasting 2018 inflation at 2.3% (from 1.6% in 2017). However, "economists" say that for any substantive hit to the world economy, prices would have to push higher from these levels and stay there.

2. How will Iran impact the market ?

The jury's still out ..... not least on whether other signatories to the deal will risk the wrath of Donald Trump and continue to trade with Iran as per the 2015 agreement that the US has backed out of. Some impingement to Iranian exports is inevitable even if the extent of it is unclear at this stage, but one might expect at least some of the impact of the interruption to supply to be counterbalanced by increased pumping elsewhere.

3. Who wins from higher oil prices ?

Most major producers come under the banner of emerging nations, led by Saudi Arabia and Russia of course. Nigeria and Colombia are picked out as countries further down the ladder that might particularly benefit.

4. Who loses ?

Emerging nations that aren't major producers : India, China, Turkey, Taiwan, Chile, Egypt, Ukraine. RBC Capital Markets are flagging up Malaysia, Thailand, China and Indonesia as those with the most to lose.

5. What does it mean to the US economy ?

Thanks to the boom in shale oil production, not so much and certainly not nearly as much as it would have done years ago. The old rule of thumb was that a $10 increase in the price of oil knocks 0.3% off US GDP the following year .... these days they're talking about 0.1%, and that will disappear too if shale oil production keeps rising.

6. Will it lead to higher inflation around the world ?

Inevitably, though the degree will vary considerably. Energy plays a big part in measures of consumer prices, but because it can be so volatile many prefer to follow such readings ex-food and energy.

7. What does it mean for central banks ?

Notwithstanding the above, rises in inflation will have one less reason to keep their monetary policy on hold while the US Fed  presses on with tightening. India will be badly affected and is already under pressure to raise rates to defend a very weak rupee, whilst other affected nations such as Thailand and Indonesia would be likely to tighten policy quicker if the excuse of low inflation is removed.