Low Oil Prices Won’t Last

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Slumping oil prices may have benefited Asia’s big importers, but the recent slump is unlikely to continue, analysts warn.

By the end of last week, crude oil’s benchmark North Sea Brent had fallen below $70 a barrel, its lowest close since May 2010, while U.S. crude fell to a low of $65.84 a barrel. Prices have slumped after OPEC’s November 27 decision not to crimp production, with prices diving by nearly 40 percent over the past five months.

According to Reuters, Saudi Arabia has offered discounts to Asian and U.S. buyers in an attempt to increase pressure on U.S. shale oil producers to slow output. Helped by the shale revolution, U.S. oil production recently reached its highest level in more than three decades.

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Analysts polled by Reuters have forecast an average Brent price of $82.50 a barrel in 2015, down $11.20 from the previous survey and the biggest downgrade since the global financial crisis, with OPEC member Nigeria cutting its own projection to just $65 for next year.

The winners from the low prices include Asia’s major oil importers such as China, Japan and India, which import the bulk of their oil supply. India, Indonesia and Malaysia should also benefit further by curbing fiscally expensive fuel subsidies.

“The lower the prices, the better for us,” K.V. Rao, finance director at India’s third-biggest state refiner, Hindustan Petroleum, told Bloomberg News, adding, “We’re currently in a sweet spot.”

Lower oil prices have helped Indian Prime Minister Narendra Modi curb fuel subsidies and reduce one of Asia’s largest fiscal deficits. The cost of the nation’s oil imports dropped to $164 billion in the year to October from a peak of $169 billion in July, and is set to fall even lower. Analysts at HSBC have cut their forecast for the nation’s current account deficit to 1.5 percent of gross domestic product (GDP) from 2.1 percent previously, while cheaper oil has also helped moderate consumer prices.

China is the world’s largest net oil importer with imports accounting for almost 60 percent of its domestic supply, making lower prices beneficial for economic growth. According to Bank of America Merrill Lynch, every 10 percent fall in the oil price boosts China’s GDP by 0.15 percent, while the current account balance improves by 0.2 percent and consumer inflation drops 0.25 percentage points.

China imported nearly $220 billion worth of crude oil in 2013, with the recent lower prices resulting in an estimated $30 billion saving by year-end if prices continue falling, according to Xinhua.

For Japan, the world’s third-largest oil importer, lower prices should help prop up an economy which recently fell into recession. However, cheaper oil also challenges efforts to end deflation.

Bank of Japan governor Haruhiko Kuroda cited falling commodity prices among reasons for launching the central bank’s recent expanded bond buying program, with the BOJ struggling to reach its 2 percent inflation target. Yet speculation over further BOJ action to weaken the yen could further raise import costs for consumers, mitigating the benefit of lower oil prices.

In Indonesia, President Jodo Wikodo’s move to increase the price of subsidized gasoline by more than 30 percent wiped $8 billion off the nation’s fuel bill, with further falls in the price providing more economic stimulus.

“The savings from the fuel price hike were about 1.1 percent of gross domestic product but now the savings could be up to 1.5 to 2 percent of GDP,” Santitarn Sathirathai, an economist at Credit Suisse in Singapore, told the Financial Times. “That is free fiscal ammunition that they can use to support growth.”

For Asian economies that have relatively small or no fuel subsidies, including the Philippines, South Korea and Taiwan, Credit Suisse expects inflation to fall sharply due to the lower oil prices, allowing for “more dovish monetary policy than would otherwise have been possible.”

The analysts expect slower than previously forecast interest rate hikes in the Philippines in 2015, while South Korea and Thailand could cut rates further. Already, lower fuel prices have delivered South Korean consumers an effective tax cut of 0.7 percent of nominal GDP.

In Australia, the falling oil price has been described as a “free kick” for the economy, despite the nation’s position as a net energy exporter.

“From an economic perspective it’s a very big positive, the positives far outweigh the negatives,” Commsec economist Savanth Sebastian told the Sydney Morning Herald. “The flow-on effect for business is a very big positive, we’ve already seen the rebound in transport stocks and airlines. The other positive is the impact on household budgets. In the last four months or so households have saved 20 cents a liter on the pump.”

However, lower oil prices are damaging for the nation’s liquefied natural gas industry, with Australia set to become the world’s biggest LNG exporter later this decade. Most LNG exports to Asia are sold at oil-linked prices, with any price falls also curbing expected government tax revenues. However, top LNG importers Japan and South Korea may enjoy the benefit of lower prices for consumers and industry.

$100 Forecast

Yet the good news may not last forever for Asia’s oil importers. According to UBS, the oil price should recover to $100 a barrel, a level that would make further oil exploration viable.

In a recent research note, Morgans chief economist Michael Knox suggests that the oil price “will only stay low while the U.S. dollar is rising.”

“The popular view is that the oil price is falling because of rising oversupply. Were that true, this oversupply would drive inventory levels up. But what we see in the U.S. is that the oil price has been falling where the inventory levels have been falling. This means that there must be some other cause than excess supply causing the decline in the oil price,” he said.

According to Knox, the falling oil price has resulted in “one of the fastest rises in the US dollar since the early 1970s…Once the US dollar ends this major move, the oil price will go back to being driven by normal fundamentals of supply and demand. Our view is that the normal levels of supply and demand suggest a price of Brent oil of more than $100 per barrel.”

Knox argues that this will occur early next year, warning that “those who think that oil prices are going to stay low may be dramatically disappointed.”

For Asia though, the lower oil prices could not have come at a better time.

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