- OPEC decision to leave output unchanged sends oil price to 4-year low…
- …while sharper than expected declines in inflation in Germany, Spain and Belgium …
- … signal that eurozone inflation is heading close to zero
- Fall in oil prices is good disinflation as it benefits economy, but ECB will worry about expectations
OPEC sits on its hands, leading to oil price slide
OPEC kept its oil production quota unchanged at 30 mb/d at its meeting. In its statement, OPEC clarified that it is up to the market to find a new equilibrium oil price. OPEC judged that a level of oil prices of around $100 per barrel is a level that is comfortable for consumers and producers. Nevertheless, OPEC has no target price, but just wants to see fair prices at which consumers are satisfied, and producers have a decent income. Although OPEC stressed several times that it will produce 30 mb/d during the first half of 2015, it was not willing to confirm whether this would be the actual ceiling.
No urgent need for action seen
Despite the recent sharp decline, the average Brent oil price for 2014 is still above USD 100. Therefore, the need for an immediate OPEC oil production cut was not judged to be high. The crucial issue is whether current levels prove to be temporary or a more structural phenomenon. Only if oil prices were to structurally remain at these low levels, would declining oil revenues start to create problems for the public finances of producers. This is not the case yet.
Oil prices likely to bottom out in coming weeks
As a result of the outcome, oil prices dropped to the lowest level in more than four years. Some more pressure might be expected in the near term as the US was closed due to the Thanksgiving Holiday. The main question is what will happen in the coming weeks. We judge that oil prices will start to bottom out. This reflects a number of considerations:
1) The OPEC event has passed, and the markets need to adjust to the new situation (Buy-the-Rumour, Sell-the-Fact)
2) The lower oil prices will boost speculation of new delays of projects, dampening future supply expectations
3) Libyan oil production remains very uncertain and is likely to drop in the coming months
German inflation lower than expected in November ….
Meanwhile, annual inflation in Germany declined by 0.2 percentage points in November. HICP inflation, now stands at just 0.5% yoy. Detailed regional data show that the decline was concentrated in the notoriously volatile package holiday component, which should bounce back next month. However, energy and food price inflation both fell as well.
… pushing eurozone inflation closer to zero
Inflation in Spain and Belgium also fell in November. In Spain, the HICP inflation rate moved to -0.5% yoy from -0.2% in October, while Belgium’s rate moved back into negative territory (to -0.1% from +0.1%). All this suggests that eurozone inflation (to be published today) fell to 0.2% from 0.4%.
Fall in oil prices good for the economy, but ECB is worried
The decline in oil prices will keep eurozone inflation at very low levels over the next few months. Falls in inflation driven by oil prices are good news for net oil importers. They increase consumers’ real disposable income and reduce costs for most companies. However, because inflation is at such low levels already, the ECB will become even more concerned about the credibility of its inflation target. The likelihood that inflation could remain lower for even longer therefore adds to the already strong case for additional monetary easing. The central bank will likely step up its asset purchases before long.