Crude to stay cheap on ‘contagious’ economic rout – OPEC

LONDON (ICIS)–The Organisation of Petroleum Exporting Countries (OPEC) said on Wednesday oil prices will stay low in the aftermath of the “great recession” which has crimped expenditure in major economies while oil producer nations see spending cuts for new projects.  

OPEC’s estimates for crude supply and demand remained practically unchanged from its last Monthly Oil Report published on 18 January.

Nevertheless, the oil cartel drew a dark scenario for the global economy as Brazil and Russia entered their second year of recession and China continues its slowdown.

“On previous occasions of oil price declines, it was relatively easy to explain that lower oil prices were supportive of the global economy. This time, however, it seems that the overall negative effect from the sharp decline in oil prices since mid-2014 has outweighed benefits in the short-term and there seems to be a ‘contagious’ effect taking place across many aspects of the global economy,” said OPEC.

“Due to the after-effects from the ‘great recession’, the potential that consumer spending ability could rise is limited. Additionally, the major central banks are not able to significantly lower interest rates further.”

OPEC’s pessimistic approach follows that of the International Energy Agency (IEA) report published on 9 February, in which it also outlined a series of factors which will keep oil values low.

OPEC’s own GDP growth estimates were revised down for the world’s major economies, with exception of the euro-zone which it forecasts 1.5% growth this year.

However, it lowered its global 2016 GDP growth forecast to 3.2% compared with its January report on the back of lower expectations for the US where it expects 2.2% growth, Japan at 0.9%, China at 6.3% and India at 7.5%.

Russia and Brazil’s GDP growth forecasts were also revised down by OPEC which expects both countries to stay in recession for the rest of the year. 

Brazil output will be the hardest hit with a decrease in its GDP of 2.2% this year while Russia’s output this year will contract 0.3%.

The Vienna-based organisation also said cuts in investment projects in oil producing nations are affecting developing countries and developed economies like the US, Canada and the UK, a scenario it forecast to persist as long as uncertainty continues.

The oil cartel also warned “tax regimes and currency” oscillations are offsetting the potentially positive effects from low priced crude oil while contagious effects from low oil prices are already biting “fragile economies.”

“The considerable decline in oil prices is also affecting a wide range of important sectors, including manufacturing or agriculture, further accentuating the trend of low inflation in major economies,” said OPEC.

“In addition, the exposure of banks to the oil industry – in the form of loans granted to small- and medium-sized oil companies – and the relatively large share of junk bonds from shale producers has added to concerns in the financial industry.”

OPEC also said only a colder winter in the northern hemisphere would increase heating fuel needs after experiencing mediocre demand during December and January-to-date.

The group expects modest growth in transportation fuels compared with 2015 as India, the country which was expected to post the highest demand, has banned large diesel engines in big cities due to pollution-related problems.

A bright spot within crude oil derivatives will come from petrochemicals, where demand will remain healthy, according to OPEC.