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Indian & Global Economy

Decoding OIL Production cut and Markets

The news that Saudi have suggested to cut  oil production 5%, by each of the OPEC member would balance the oil market. This is a good news for the energy sector and its companies. Shale gas companies would also become active and efficient produces would  rejoice the freedom again to plan their investments.

But wait the buck would stops here only. the markets are not down because of the oil price crash. Oil price crash is because the consumption demand of the world is poor. Economies due to high leverage of government, corporate and household debt, are not in a position to increase consumption and investments.  

Oil price increase would  affect the emerging countries adversely as most of these are energy importing nations.  sharp increase up-to 42/45 USD would also affect negatively consumer behaviour in advanced countries.

The  increase up-to $45 ( the most optimistic scenario) would only help in balancing the budgets of the producers that too partially in most cases, and can not lead to investments or increase in government spending even by them.

Global markets would have some feel good factor for the increase in oil prices and after that markets would focus on more fundamental i.e. questions of growth, investments, consumption growth and reduction of the debt/GDP ratios. The fact is that slowdown in global growth is there and it will take time before becoming healthy. Global debt weight have to lighten before economy can run.

There is also catch in the possibility of reduction in the oil production. Will Iran, Iraq and Libya agree to the reduction and deprive them from economic growth. It looks unlikely. It means that global over production of 2.0 plus mbpd would continue for some time till beginning of 2017 when the demand would match up the production. Very soon fractures in OPEC would surface and they will struggle for an agreement to cut the output.

If OPEC and Russia is able to achieve the impossible then also good news would be on inflation front and preventing unrest in the some of the OPEC countries. This is positive for limiting the negative surprise and decline of markets, on these accounts; but would not help the growth of the world economies.

So enjoy temporary bounce in the market and jitteriness thereafter.  The only thing which could boost markets is earning which is unlikely too.

Dinesh Goel

Managing Partner - ACE AGRICOM

28th Jan 2016

(investors should ascertain the facts before making investments as the views expressed are personal views of the author)