Global Daily – The trouble with oil prices

by: Hans van Cleef , Aline Schuiling , Arjen van Dijkhuizen

Oil view: Explaining the drop in oil prices – In the past days, oil prices dropped significantly as a result of Libya’s and Nigeria’s increase in production. This has raised concerns that the rebalancing of the oil market could take (much) longer than anticipated. This drop in oil prices followed last week’s tensions surrounding Qatar, which triggered market speculation that OPEC would not stick to its production cut agreement. On top of that, financial markets are still concerned that US inventories could remain at record high levels for longer than anticipated. As a result, oil prices are currently trading around USD 46/bbl for Brent, and USD 43.50/bbl for WTI. We expect both Brent and WTI oil prices to recover towards USD 60/bbl. At this moment, we see no strong argument to lower this forecast based on the current negative market sentiment for the following reasons: To begin with, we see that US crude stocks already started to decline. Furthermore, we do not expect US crude production to continue its recovery into 2018 in the same pace as seen in recent months. Investments in the oil sector (non-OPEC, non-US shale) remain under pressure. This will affect supply growth negatively, while we expect global demand to remain strong in the coming time. Although there are downside risks to this forecast, we still believe in the longer term upward direction. All in all, our base case scenario remains unchanged. (Hans van Cleef)

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Euro Macro: Labour market recovery continues; no wage pressure yet – A number of important labour market reports for the eurozone have been published in recent days. To begin with, employment rose by 0.4% qoq in Q1, the same rate as in 2017Q4. The yoy rise in employment increased to 1.5% from 1.4%. Consequently, the gap between  GDP growth and employment growth stabilised at 0.4 percentage points in Q1. Labour productivity growth has been hovering around this level since the start of 2015. More forward looking labour market reports suggest that employment growth will pick-up in the coming quarters. Indeed, the vacancy rate increased from 1.7% in Q4 to 1.9% in Q1, reaching its highest level since the start of the series in 2007. Also, the employment component of the composite PMI currently is at historically high levels, in line with a further strengthening of employment growth. Despite the ongoing labour market recovery, wage growth slowed down somewhat in Q1. A report by Eurostat showed that nominal hourly wage growth declined to 1.4% yoy in Q1, down from 1.6% in Q4, while a separate report by the ECB showed that the yoy rise in total labour costs declined to 1.2% in Q1 from 1.4% in Q4. The ECB’s measure of unit labour costs fell to 0.8% yoy from 1.0% in Q1. Wage growth is being limited by the still significant amount of slack in the labour market. In addition labour market reforms in some countries may have lowered the NAIRU. Consequently, wage growth as well as core inflation are expected to remain depressed during the rest of this year. (Aline Schuiling)

China view – A shares included in MSCI Emerging Markets Index – On Tuesday after Wall Street closing, MSCI announced the introduction of China A Shares into its equity index, for the first time in history. In recent years, MSCI had refused to include these ‘onshore’ shares denominated in CNY, given all kinds of governance related concerns. This time around, MSCI had – in consultation with key stakeholders – changed the criteria for inclusion and had sharply cut the list of potentially eligible shares to be included. Admittedly, the initial share of these onshore stocks to be included in MSCI’s EM index is small, around 0.7% (PM: the total China-related weight in the MSCI EM index, including offshore Chinese stocks or H shares, is around 30%). Still, in our view inclusion of A shares is an important symbolic step, supporting foreign demand for the stocks concerned. It may encourage the Chinese authorities to put further efforts in improving the equity market infrastructure and governance and will help deepen domestic financial markets. It will support future foreign demand for the stocks concerned and that could help Beijing to manage net capital flows. On the other hand, over time a rise in foreign portfolio flows into China could make the country more sensitive to changes in risk sentiment of global financial markets (Arjen van Dijkhuizen)