21 October 2018
Oil producers are being forced to change their strategy as plunging oil prices hurt fiscal revenues. Photo: Bloomberg
Oil producers are being forced to change their strategy as plunging oil prices hurt fiscal revenues. Photo: Bloomberg

Risky assets to shine again if oil price stabilizes

The US dollar has rallied against major currencies, mainly because major oil-producing countries agreed to freeze output.

The move has revived investors’ risk appetite.

The oil producers have shown clearly that they don’t want the oil price to fall further.

Meanwhile, the Bank of Japan has imposed negative interest rates, and the European Central Bank is likely to expand its monetary easing measures further next month.

The low-interest-rate environment is set to stay in place, which has in turn lured investors back into risky assets.

A strong dollar and low oil prices have suppressed inflation.

US Federal Reserve chairwoman Janet Yellen said she was surprised by the tumbling oil price.

In fact, an imbalance between supply and demand is the major factor behind sluggish oil prices, and lackluster global demand also played a key role.

The Fed may not rush to hike interest rates further, but that does not mean it has deviated from the path of gradually raising rates this year.

The pace of future rate hikes is dependent on the data.

The market has been worried over the last few weeks that the US economy might slip into recession again.

Nevertheless, recent economic data shows that US economic growth is still resilient.

Continued improvement in the job market, low unemployment rates and accelerating wage growth all point to healthy US economic growth.

Also, US consumer spending regained momentum last month, which has mitigated market jitters about the risk of a US economic recession.

And the US dollar has also returned to its upward trend.

The US economic outlook and divergent monetary policy from other central banks will lure more capital into the United States.

The market is now closely watching whether the Organization of the Petroleum Exporting Countries and non-OPEC oil producers will be able to reach an agreement on cutting production.

OPEC producers Saudi Arabia, Qatar and Venezuela and non-OPEC producer Russia have agreed to fix production at January levels.

However, they failed to reach the agreement to cut output the market had expected.

Nevertheless, the oil output freeze will pave the way for the oil market to regain balance in the second half of the year.

Many oil producers have plunged into a difficult fiscal situation as the oil price collapsed.

These countries are forced to change their strategy to prevent a continued deterioration in fiscal revenue.

The recent agreement is the first on oil output among oil producers since November 2011.

It’s a sign that these oil producers have altered their policy stance.

In that sense, the market should re-evaluate the future direction of oil prices.

Risky assets will face less pressure as long as the oil price stabilizes.

Nevertheless, there is limited upside for the oil price in the short term given excessive supply.

This article appeared in the Hong Kong Economic Journal on Feb. 19.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment strategist and vice president, treasury & markets division, DBS Bank (Hong Kong)

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