LONDON (ICIS)--Despite oil prices languishing, the currency crisis is leaving many economies aching under the increased cost of imports. The devaluation of India’s rupee bolstered the oil import bill of the world’s third largest crude buyer by over $5bn in 2018.
The squeeze on these oil thirsty economies could hurt demand, and in turn, provide headwinds to crude oil futures in 2019.
ICIS analysts have forecast the average Brent futures price at $60.50/bbl for 2019. Major banks, namely Goldman Sachs and Societe Generale, are understood to have revised down predictions from around the $70.00/bbl mark to closer to ICIS’ estimate. Even with crude prices in this range, the currency induced premium on oil imports remains sizeable.
The countries in the table below import over 15% of global oil demand. Should the exchange rate gap between the dollar and this basket of other currencies remain the same in 2019, and prices move as forecast, these nations will equivalently pay $6.00/bbl or 10% more for oil this year.
The International Energy Agency (IEA) has forecast the market could return to undersupply in the second half of 2019 should OPEC stick to its current output cut pledge. This will shore up oil prices but could deepen woes for emerging markets.
In India, a US dollar oil price of $75.00/bbl would effectively cost $85.00/bbl in rupees compared to the start of 2018.
Brent futures smashed through the $85.00/bbl milestone on the 1 October 2018, with the benchmark contract on track to register its fifth consecutive quarter of gains. Since then, sentiment has swiftly reshaped to bearish with WTI and Brent both losing over one-third of their values in the fourth quarter.
The lower oil prices would in theory be beneficial for emerging economies. However, 2018 has seen the US dollar firm against the majority of other currencies, making the cost of a barrel of oil in countries where the native currency has depreciated against the dollar much more expensive.
The impact is compounded by the fact that these economies are some of the world’s most prevalent oil importers. A Turkish buyer, paying in lira, would now receive one-third less oil than a year ago whilst paying the same amount.
Asia’s emerging markets are the key driver for global oil demand growth, with the rising cost of crude stoking concerns about expectations of further increases in consumption.
Oil prices are already under pressure from a weaker demand outlook, getting caught in the downdraught of a wider economic slowdown. The emerging economy currency crisis is amplifying this effect and could cause Asian imports to lose momentum.
The fourth quarter’s oil price tailspin has lessened the effect of weaker emerging markets, but it still persists. The effective cost of a barrel of oil in Pakistan is over $75.00/bbl despite oil prices dipping below $60.00/bbl – a currency induced $15.00/bbl premium versus the start of 2018.
In real terms the US dollar appreciated to its highest level since early-2017 and prior to that 2003. A firmer dollar, as well as increased treasury yields in advanced markets has triggered emerging market currency sell-offs.
In 2018, overseas funds reportedly pulled $19bn from India, Indonesia, the Philippines, South Korea, Thailand and Taiwan – Province of China, one of the largest instances of foreign capital loss since 2008.
Political instability in countries such as Brazil has also increased selling pressures on investors, pushing currencies to new lows. In Turkey, market participants fear the government will attempt to offset the central bank’s monetary tightening as they seek hasty economic growth.
The dollar’s advance in 2019 hinges on the outcome of the China-US trade spat and the Federal Reserve’s interest rate policy. Officials from the world’s two largest economies met in Beijing from the 7-9 January in an attempt to dissipate the ever-escalating trade tensions.
Discussions were positive, providing tailwinds to dollar movements in early January.
However, dovish Federal Reserve rhetoric on 9 January hinted at an end to US interest rate hikes which could halt the currency’s upwards move in 2019.
India spends almost $500bn/year in total on all its imports, roughly one-quarter of China. This bill was around 1.3% higher solely due to depreciating rupee increasing the cost of oil imports.
Similar sized increases can be seen in both Turkey and Brazil, countries where native currency depreciated massively against the dollar in 2018. Currency derived increases in oil import costs are therefore having a sizeable impact on the wider import picture.
The impact on the oil import bill of these oil consuming nations is substantial even as prices touch 18-month lows. Oil price forecasts just above $60.00/bbl in 2019 may limit the damage, but volatility arising from geopolitical events could cause unforeseen price hikes.
Additionally, with the IEA predicting undersupply in the latter parts of 2019, the inflationary combination of higher oil costs with weakening currencies could cause the global economy to lose momentum. This would crimp oil demand and may filter into sentiment in the oil market.
Focus article by Richard Price.
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