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Will Higher Oil Prices Boost The Global Economy

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The recent oil price rally is sure to boost petrodollar inflows into the government coffers and sovereign wealth funds of oil producing nations.

A part of those petrodollars could flow back into the global markets if oil producing countries boost investments in various asset classes, according to some large investment banks.

These potential new petrodollar inflows could be a shot in the arm for global markets at a time when central banks around the world are starting to normalize their monetary policies.

Yet, as oil producers struggle to patch up budget deficits caused by the oil price rout of 2014-2016, it shouldn’t be taken for granted that the increased petrodollar incomes at sovereign wealth funds and forex reserves of the oil nations will necessarily translate into a huge ‘recycling’ of the newly earned dollars into the global markets.

That’s because many of the oil exporters—especially those in the Middle East—still need to plug budget gaps and finance increasingly investment-intensive projects at home. Case in point—OPEC’s largest exporter and de facto leader Saudi Arabia, which plans hundreds of billions of U.S. dollars-worth of mega projects while it continues to run budget deficits and its net foreign assets struggle to post any significant gains.

Between 2014 and 2016, the combined oil revenues of the world’s oil producing nations plunged from US$1.6 trillion in 2014 to less than US$800 billion in 2016, according to JPMorgan Chase & Co. analysts led by Nikolaos Panigirtzoglou. The plummeting revenues from oil in that period limited the ability of the sovereign wealth funds and central banks of the oil exporters to buy foreign assets. According to JPMorgan, the oil countries’ funds and FX reserve bodies may have spent US$160 billion less on equities and US$80 billion less on bonds in 2015-2016.

Now, “The increase in oil prices is generating a shift in flows and incomes across the world, effectively reversing the previous big shift seen between 2014 and 2016,” JPMorgan said in a note earlier this week, cited by Bloomberg.

According to JPMorgan and other analysts, the higher oil prices would benefit equity markets more than the bond markets, and in FX, the euro more than the U.S. dollar.

“The rise in oil prices should create a positive flow in equity markets this year,” JPMorgan reckons. “Where the rise in oil prices poses more risk is in bond markets as the squeeze in oil consumers is reversing their previous saving impulse of 2015/2016, creating a bearish flow for bond markets this year.”

According to Michael Hewson, chief market analyst at CMC Markets, the rise in oil prices coupled with rising yields are helping to underpin equity markets for now.

“It’s this move higher in crude oil prices, along with the rise in demand, that is helping fuel the recent rise in yields as well as the positive tone for equity markets. However, if it continues too far, we could start to see it act as a drag on equity markets, if prices along with yields start to move even higher,” Hewson said in a commentary on Tuesday.

In FX, with oil prices possibly rising further, to say $80 a barrel, the wealth funds of oil exporters could diversify their FX reserves, potentially pressuring the U.S. dollar, Mansoor Mohi-uddin, head of currency strategy at NatWest Markets in Singapore, told Bloomberg.

If oil prices continue to increase, the Brent price—which has typically had a positive correlation with the euro in the past decade but not in the past year—could again start having a positive correlation with the European currency. In this case, “all the Middle East’s largest energy producers are likely to build excess FX reserves increasing the risk of renewed dollar diversification out of the region,” Mohi-uddin said, adding that the U.S. dollar could struggle to appreciate versus the euro.

Higher oil prices are boosting oil producers’ coffers now, but it’s not clear yet if the petrodollars will be heavily reinvested in global asset classes as countries may need to address budgetary and monetary issues and policies at home first.

By Tsvetana Paraskova for Oilprice.com

 



66 Comments on "Will Higher Oil Prices Boost The Global Economy"

  1. Cloggie on Fri, 27th Apr 2018 1:44 pm 

    Um Davy, the topic is oil prices.

  2. MASTERMIND on Fri, 27th Apr 2018 1:50 pm 

    Merkell is now turning on Iran and is caving into the US deep state! She does what she is told! LOL HAHAH Clog! Looks like Putin and ASSAad, and Iran are all alone and trapped like rats! LOL

    We take the oil first, deal with due process second!

  3. GregT on Fri, 27th Apr 2018 2:10 pm 

    You remind me of my daughter Davy, when she was 3.

  4. Cloggie on Fri, 27th Apr 2018 2:18 pm 

    Really millimind? Any details, preferably peer-reviewed?

    All I see is that Europe and Don slowly begin to appreciate each other, an excellent development:

    http://www.spiegel.de/fotostrecke/angela-merkel-trifft-donald-trump-in-washington-fotostrecke-160368.html

    Before you know it, Merkel, Macron, Putin and Trump will be seen fox-hunting in Siberia, with Trump and Putin shirtless.

  5. Cloggie on Fri, 27th Apr 2018 2:21 pm 

    You are lying again millimind:

    “Beide Politiker waren sich einig, dass sie Differenzen in der Frage haben, wie mit Iran und dem Atomdeal umgegangen werden solle.”

    There is no agreement about Iran, you fool. Europe wants Washington to stick to the Iran-deal.

  6. Cloggie on Fri, 27th Apr 2018 2:34 pm 

    This was a very good week for Trump:

    Macron, Korea, Merkel… Feinstein:

    http://www.latimes.com/politics/la-pol-ca-feinstein-trump-good-president-20171104-htmlstory.html

    Feinstein discourages talk about impeaching Trump.
    Trump solidified his presidency bigly.

    How to bring this to millimind?

  7. MASTERMIND on Fri, 27th Apr 2018 2:42 pm 

    Western firms primed to cash in on Syria’s oil and gas ‘frontier’

    https://medium.com/insurge-intelligence/western-firms-plan-to-cash-in-on-syria-s-oil-and-gas-frontier-6c5fa4a72a92

  8. MASTERMIND on Fri, 27th Apr 2018 2:43 pm 

    US economy slowed in first quarter after Trump’s $1.5tn tax cuts

    https://www.theguardian.com/business/2018/apr/27/us-economy-slowed-in-first-quarter-after-trumps-15tn-tax-cuts

  9. MASTERMIND on Fri, 27th Apr 2018 2:44 pm 

    Syria intervention plan fueled by oil interests, not chemical weapon concern

    https://www.theguardian.com/environment/earth-insight/2013/aug/30/syria-chemical-attack-war-intervention-oil-gas-energy-pipelines

  10. Cloggie on Fri, 27th Apr 2018 3:12 pm 

    Climate change between Merkel and Trump. Dare you say “warming”?

    German television positive about the meeting.

  11. Cloggie on Fri, 27th Apr 2018 3:30 pm 

    “Western firms primed to cash in on Syria’s oil and gas ‘frontier’”

    I see you still read your guru Nafeez Ahmed, just like in the old days.

  12. Antius on Fri, 27th Apr 2018 3:37 pm 

    “Western firms primed to cash in on Syria’s oil and gas ‘frontier’”

    What a surprise, the Jews want Syria’s Golan oil. And voila! A false flag chemical attack and suddenly America is poised to invade. No doubt thousands of Syrians and hundreds of Americans will be killed. But who cares if a few goy get slaughtered? They are after all put on this Earth by Yahweh as tools to serve the Jewish people.

    Of course we have to invade. We cannot live with the threat of those chemical weapons. Capable of being launched in 45 minutes. Or so I hear.

  13. MASTERMIND on Fri, 27th Apr 2018 3:55 pm 

    Clogg

    Here is another excellent article from Dr Ahmed, from last year.

    Inside the new economic science of capitalism’s slow-burn energy collapse (Ahmed, 2017)
    https://medium.com/insurge-intelligence/the-new-economic-science-of-capitalisms-slow-burn-energy-collapse-d07344fab6be

  14. MASTERMIND on Fri, 27th Apr 2018 3:56 pm 

    Since the 2008 financial crash, the world has witnessed an unprecedented outbreak of social protest in every major continent. Beginning with the birth of the Occupy movement in the US and Western Europe, and the Arab Spring, the eruption of civil unrest has continued to wreak havoc unpredictably from Greece to Ukraine, from China to Thailand, from Brazil to Turkey, and beyond. In some regions, civil unrest has coalesced into the collapse of incumbent governments or even the eruption of a prolonged state of internecine warfare, as is happening in Iraq-Syria and Ukraine- Crimea.

    Increasing public dissatisfaction with government is correlated with continued government difficulties in meeting public expectations. Yet while policymakers and media observers have raced to keep up with events, they have largely missed the deeper causes of this new age of unrest—the end of the age of cheap fossil fuels, and its multiplying consequences for economic growth, industrial food production, and the Earth’s climate stability.

    N.M. Ahmed,
    Failing States, Collapsing Systems,
    Springer Energy, 2017
    http://www.academia.edu/34816514/Failing_States_Collapsing_Systems_BioPhysical_Triggers_of_Political_Violence_SPRINGER_BRIEFS_IN_ENERGY_

  15. MASTERMIND on Fri, 27th Apr 2018 4:01 pm 

    Europe is headed for bankruptcy…

    Government debt as % of GDP in Europe by country

    https://i.redd.it/96qxnizi2bu01.png

  16. MASTERMIND on Fri, 27th Apr 2018 4:07 pm 

    Ronda Rousey thinks doomsday is coming — and she’s ready for it

    https://www.usatoday.com/story/sports/2018/04/27/wwe-ronda-rousey-becomes-doomsday-prepper/557469002/

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