Baku, Azerbaijan, Nov.21
By Leman Zeynalova – Trend:
The sharp decline in oil prices in recent weeks, which saw Brent crude fall from $85 per barrel (/bbl) at the beginning of November to $67/bbl currently, is the result of a slight slowing of global demand, Fitch Solutions Macro Research (a unit of Fitch Group) said in its report.
It is largely driven by stronger-than-expected supply from the US, Libya and Iraq, and unexpected waivers on Iranian sanctions that were provided to eight countries reliant on Iranian oil, such as India, Turkey and China, according to the company.
“From a technical perspective, trendline support comes in at $60-62/bbl, which suggests that oil prices should find support in the near term. Moreover, our core view is for oil prices to recover towards the end of the year and to average $74.5 /bbl in 2018 , with strength being sustained in the coming quarters as oil prices average $81/bbl in 2019. As such, we do not forecast a sustained correction in prices,” said the report.
However, Fitch Solutions believes that the recent decline in oil prices is both positive and negative for the global economy.
“On the positive side, lower oil prices improve the terms of trade and fiscal accounts, and help to mitigate inflationary pressures of importing countries, many of which have started to come under pressure in recent months. On the negative side, it weighs on the earnings of oil exporters and fiscal revenues, and is correlated with the manufacturing sector, which could be negative for growth,” the company believes.
The report shows that oil prices have risen substantially in local currency terms this year for a whole host of emerging economies, as rising oil prices were compounded by large currency sell-offs for many emerging markets.
“While oil prices are flat since the beg inning of the year in USD terms, they have risen strongly in Argentina, Turkey, India and South Africa - to name a few countries - when adjusted for local currencies. This suggests that economies that are overly reliant on oil imports will benefit via two channels: less pressure on their trade deficits and potentially lower pass-through inflationary pressures,” said the report.
The company analysts believe that while falling oil prices are good for energy importers, the opposite is also true.
“Countries that rely on oil exports, such as Saudi Arabia, Brazil, Colombia, Mexico and Malaysia, typically get hit from lower oil prices. Many of these countries are also suffering from weak investor sentiment and private sector investment, which, combined with lower oil prices, could put downside pressure on growth over the coming quarters. At the same time, these countries typically rely heavily on revenue from oil as a main source of taxes (about 90 percent in Saudi Arabia, 20 percent in Colombia, and about 14 percent in Malaysia and Mexico),” Fitch Solutions said.
As such, if sustained, lower oil prices would result in s lower exports, weaker investment and lower fiscal s pending by the government (or larger deficits ), which would put downside pressure on growth in major oil-exporting countries, according to the company.
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