By Dr Shane Oliver
Chief Economist and Head of the Investment Strategy team
Oil prices are down more than 70% from their levels two years ago driven by a combination of a surge in supply relative to demand and a rise in the value of the $US.
Further weakness down to $US20/barrel is possible, but we are getting closer to the point where supply slows.
So far the negative impact on oil producers has predominated but ultimately it will be positive for growth.
The fall in petrol prices is saving the average Australian household around $14 a week versus two years ago.
Our view on the financial market turmoil has been covered in the last two Oliver’s Insights – except to add that central banks are now sounding more dovish. This started with the ECB which is now expected to ease at its March meeting and is also evident from the Fed which last night was less positive on the growth outlook and indicated it was monitoring recent economic and financial developments. The probability of a March Fed hike is now just 20% and rather than four Fed rate hikes this year I see only one or none. The Reserve Bank of NZ has also turned more dovish and I expect the RBA to do the same.
The one big surprise in the ongoing turmoil in financial markets is the role played by oil. Past experience tells us surging oil prices are bad and plunging oil prices are good. But that has not been the experience lately. It seems there is a positive correlation been oil prices and share markets (“shares down on global growth worries as oil plunges” with occasional “shares up as oil rallies as growth fears ease”). So what’s going on?
Why the oil price plunge?
The oil price has collapsed because the global supply of oil has surged relative to demand. Last decade saw the price of oil go from $US10/barrel in 1998 to $US145 in 2008. After a brief plunge during the GFC it average around $US100 into 2014.
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