by Chris Becker
As I’ll explain in my market roundup later this morning, oil overnight collapsed as the majority of North Atlantic traders and market positioners returned from holidays and sent the commodity complex into chaos with WTI and Brent falling over 5%:
West Texas Intermediate slid 5 percent in New York while Brent fell below $55 in London for the first time since May 2009. Russia’s output rose to a post-Soviet high while Iraq, the second-largest producer in OPEC, plans to boost crude exports to a record this month.
While this is continued good news for households and energy-dependent businesses both large and small, in aggregate these price shocks have preceded larger financial shocks. This is part of the emerging market/OPEC/Russia nexus, and as explained earlier, underpinned by the speculative frenzy in US shale gas development.
This frenzy has added 0.5% to nominal GDP growth to the US economy and falling oil prices, like the slump in iron ore here in Australia, will reverse that GDP additive.
After an initial transitory positive impact on GDP, Bridgewater explains that lower oil investment and production will lead to a drag on real growth of 0.5% of GDP.
The firm noted that over the past few years, oil production and investment have been adding about 0.5% to nominal GDP growth but that if oil levels out at $75 per barrel, this would shift to something like -0.7% over the next year, creating a material hit to income growth of 1-1.5%.
We’ve more than levelled out here of course and prices in the $40-50 region amount to a serious unwinding of financial speculation within the commodity complex, an unwinding that took stock markets down over 2% last night.
As for whats causing the continued slump in oil, beyond the leveraged speculation (have a look at oil pre-GFC), its still all about burgeoning supply and reduced demand. As Vox points out:
So while you may enjoy a slightly lower petrol price at the pump, just be wary that these lower prices may cause your super portfolio to take a hit in the year ahead as correlated volatility impacts risk markets everywhere.
Of course, there are opportunities here – oil is historically very volatile and has the capacity to breakout in multi-double digit fashion. Commodity ETFs and Woodside Petroleum (WPL) should be on your investment radar.