Global Daily – More oil price weakness?

by: Hans van Cleef , Aline Schuiling , Maritza Cabezas

Global-Daily-Insight-15-October-2014.pdf ()
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  • Rapid decline in oil prices … volatility likely until the OPEC meeting of 27 November
  • German ZEW falls further
  • September’s US small business optimism survey falls, but suggests still good time to expand

Rapid decline in oil prices…

The (Brent) oil price has dropped to below USD 88/bbl, the lowest level since December 2010. There are several reasons for this. For starters, disappointing economic data from the eurozone and China put prices under pressure. Moreover, ongoing strong oil production by both OPEC and Non-OPEC countries also led to lower prices. Furthermore, the International Energy Agency (IEA) signalled a rise of both OPEC and Non-OPEC oil production in September. Especially the unexpected rise (+25%) of Libyan oil production contributed to the oversupply in September. As a result, market expectations for a longer period of oil oversupply increased. This oversupply has existed already since 2012 (with the exception of only three quarters). Meanwhile, the IEA indicated in its monthly Oil Market Report that its expectation for oil demand in 2014 and 2015 was adjusted lower. Last but not least, the US dollar strongly appreciated as a result of differences in monetary policy between the eurozone and the US. This also hurt oil prices.

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…but volatility likely until the OPEC meeting

The crucial question is what the direction for oil prices will be in the coming weeks. Our view is that prices will probably remain volatile, especially until the upcoming OPEC meeting on 27 November, where quotas will be discussed (see our Energy Monitor of October to be released tomorrow). Even though further pressure on oil prices cannot be excluded, an upward price correction seems somewhat more logical after the sharp drop that we have seen recently.

German sentiment falls further

Germany’s ZEW economic sentiment indicator fell from 6.9 in September to -3.6 in October, returning to negative territory for the first time since November 2012. The current level of the indicator means that the percentage of respondents that expect the German economy to deteriorate in the coming six months is slightly larger than the percentage expecting improvement. Still, almost half of all respondents expect no change in the economic conditions. According to the ZEW institute, sentiment was hurt by geopolitical tensions, the weak economic developments in some part of the eurozone and the disappointing August economic data for Germany. As we have mentioned in earlier Daily Insights and in other publications, we think that the most likely scenario for the eurozone economy in the coming quarters is one of modest recovery. To start with, the bad August data for Germany was due largely to a shift in holidays and should be followed by a rebound in September. Moreover, the fall in the euro should boost the eurozone’s net exports, while stronger global demand will also help. Meanwhile, domestic drags on the economy are also easing, and the hit to confidence form the Ukraine crisis is also likely to ebb given that tensions have eased.

September’s US small business optimism survey falls

September’s NFIB business optimism survey, based on a random sample of 608 small business owners, fell to 95.3 from 96.1 the previous month. Despite that the majority of small business owners said they expected the economy to improve and that it was a good time to expand, more owners said that they expected a slowdown of sales and that their credit needs were not met. Meanwhile, owners had a hard time filling job openings. Indeed, 50% of the owners said that they had hired or tried to hire in the last three months and 42% had a hard time finding qualified candidates for open positions. This report is also useful for looking at the changes in worker compensation, which signals wage growth going forward. A total of 15% of managers said that they anticipated increasing wages in the coming months, unchanged from the previous month. The reported gains in compensation are consistent with an economy with reasonable growth. Small businesses are moving slowly in the right direction and we expect that job openings will recover in the coming time.