Investment markets and key developments over the past week
- Shares had a positive week helped by mostly good economic data as the Chinese easing and expectations for more easing in Europe continued to impact. However, energy stocks were hammered as the global oil price plunged in response to a decision by the OPEC not to cut back production levels. US shares rose 0.7%, European shares gained 1.6%, Japanese shares rose 0.6% and Chinese shares surged 7.9%. Australian shares rose just 0.2% as falls in energy stocks limited gains. OPEC’s failure to reach agreement saw the oil price plunge below $US70/barrel, its lowest since 2010. The plunging oil price also pushed bond yields sharply lower as it depresses inflation. Most commodity prices fell, with the iron ore price falling below $70/tonne and this along with another Reserve Bank of Australia (RBA) comment that the Australian dollar is too high saw the Australian dollar fall further.
- How far the oil price will fall is anyone’s guess (just as its rise last decade was), but history tells us that it can fall considerably more than might be expected until supply is finally cut back. In the 1980s and 1990s the oil price fell more than 70% before the bottom was hit (chart at top below). More recently oil prices plunged 78% though the global financial crisis, but the fall was short lived and supply in recent years has expanded not fallen as a result of the US shale oil revolution. So a fall back to around $US40/barrel is not out of the question.
- The 37% plunge in the global oil price since June is bad for energy producing companies and countries but, since it’s mainly due to excess supply as opposed to weak demand, it’s a huge positive for the global economy generally. Rough estimates suggest a boost to growth in industrialised countries and in Australia of around 0.3-0.4% if the fall is sustained. It will also bear down on inflation, which in turn will mean more pressure on China, Japan and Europe to ease further and a further delay in the timing of the first US Federal Reserve rate hike and likewise for the RBA. For Australian households, the plunge in the global oil price adjusted for moves in the Australian dollar indicates that petrol prices have further to fall to around $A1.25/litre (chart at middle below). This will translate to roughly a $10 a week saving for the average family petrol bill since June (chart at bottom below).
Please click here to read the full article: Weekly Report ~ 28 November 2014