In 2016, we intend (yes, it’s another New Year’s resolution) to identify each month a ‘buzzword’ that reflects a particular event or theme in financial markets during that month. The idea is to capture the ‘Zeitgeist’ while it is still fresh in our minds and thus keep a record of the year as it progresses. Highlighting the new terms and vocabulary encountered in the asset management business is a reflection of the themes and trends in our business. These include, for example, the rise of the digital economy or the progression of negative interest rates in developed economies.
Our buzzword for January is ‘oilmageddon’, a word employed by numerous pundits to describe the continued plunge in oil prices during the first month of 2016. Having dropped 37.7% in 2015, the price per barrel of West Texas Intermediate (WTI) fell by 23.7% in January. Such a significant re-pricing of a commodity at the very heart of the international trade and financial system has profound ramifications for the global economy.
Christoph von Scheurl from our Multi Asset Solutions team recently wrote an analysis of the prospects for prices and there will doubtless be more posts on the subject of oil in the coming months.
Exhibit 1: Changes in the crude oil (West Texas Intermediate) price over the period between January 2011 and 11/02/16Source: Bloomberg, BNP Paribas Asset Management, as at 11/02/2016
Oilmageddon is of course a hybrid word combining ‘oil’ and
Armageddon: (in the New Testament), the last battle between good and evil before the Day of Judgement) (Source: Oxford English dictionary)
Oilmageddon: whether driven by slumping demand or a new paradigm in the dynamics of oil markets, the oil industry – from integrated majors to rig maintenance firms – has been feeling the squeeze after the collapse in crude oil prices since 2014. The fallout is far-reaching: the business models of the oil majors are under threat, jobs and spending are cut, wells are left untapped and exploration projects do not leave the drawing board. Oil export revenues shrivel and oil-exporting governments switch into austerity mode.
Economists are debating factors that may explain the collapse in oil prices. Is it primarily due to burgeoning supply ? Or dwindling demand ? Ben Bernanke wrote an article on this blog about the correlation between oil and stock prices. Is falling aggregate demand for oil in the global economy weighing on prices of both oil and stocks? The debate continues....
However, oil consumers, private and corporate, have something to smile about: cheaper fuel. Will the effect of that ultimately suffice to push growth into a higher gear? Faster growth would stimulate oil demand, lift prices, allow the oil industry to recover and rebuild capacity, etc. Full circle.
On 22/02/16 the International Energy Agency (IEA) published their Medium-Term Oil Market Report (each year the IEA publishes reports that forecast market trends and developments for the next five years concerning the primary energy sources for global markets: oil, coal, gas and renewables). Among the points made by the IEA in this report are the following remarks:
- It is "tempting, but also very dangerous, to declare that we are in a new era of lower oil prices. But at the risk of tempting fate, we must say that today's oil market conditions do not suggest that prices can recover in the immediate future."
- "Further, it is becoming even more obvious that the prevailing wisdom of just a few years ago that "peak oil supply" would cause oil prices to rise relentlessly as output struggled to keep pace with ever-rising demand was wrong.....The world of peak oil supply has been turned on its head, due to structural changes in the economies of key developing countries and major efforts to improve energy efficiency everywhere."
- On account of the "enormous stocks being accumulated", the IEA forecasts that supply and demand will not be aligned before 2017. The IEA concludes that in the absence of any new and significant demand or supply shock, "it is hard to see oil prices recovering significantly in the short term from the levels" (i.e. around 30 USD / barrel).