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Emerging Markets Mixed Reactions to Oil Price Drop

Emerging Market Crude Oil Producers Face an Uphill Battle, While Importers Reap Benefits

The price of oil has tumbled 71.5 percent1 since the summer of 2014. In June 20, 2014, the price of a West Texas Intermediate crude oil contract was $107.20 per barrel. On Wednesday, January 13, 2016, that same barrel was trading at $30.48 on the New York Mercantile Exchange. The main factors that have pushed crude oil to a 12-year low2 are: the disruption caused by shale technology, slowing global demand, and record-high production levels.

Shale Disruption

Shale technology in North America was a major force in changing the commodities landscape. It allowed producers to revisit old wells and increase production to the point where the U.S. reversed its ban on exports after 40 years.3 Thanks to the advances in shale technology, the U.S. has nearly doubled its oil production.4

Demand Lags Supply

According to the International Energy Agency (IEA) the global supply of oil has surpassed the demand for energy since the third quarter of 2014.5 Even with crude currently at record-low prices, oil importing nations are running out of storage putting further downward pressure on crude prices.

Global Supply Reaches Historic Levels

The Organization of the Petroleum Exporting Countries (OPEC) has removed all caps on production for its members. As a result, Saudi Arabia and Iraq have been pumping record-high levels of oil, in an effort to maintain their market share from non-OPEC producers. The introduction of shale technology and the slowdown of global demand presented a great dilemma for OPEC. The organization had the option of cutting production in an attempt to stabilize prices, or engaging in a price war to grab market share from non-OPEC members, in an effort to hurt their balance sheets – they chose the latter. This gamble has put pressure on global oil producers, including Saudi Arabia, as they have been committed to a strategy of maintaining high supply, despite some pleas from other OPEC members, such as Venezuela, whose GDP depends on crude exports, and would prefer to curb production.

Emerging Market Winners and Losers of Oil Rout

The below graph, from Danske Bank, of oil exports as a percentage of GDP6 , displays the countries that are more heavily dependent on crude exports to provide growth to their economies. Nations such as Norway face huge headwinds, while emerging market nations such as Mexico, Indonesia, Malaysia, Ecuador and Colombia are ultimately better off with crude oil prices at lower levels.

Oil Exports 2014

The biggest winners will be emerging markets such as Thailand, Cambodia, Hungary, Bulgaria, Chile and India that have the benefit of cheaper energy and a way to keep inflation under control. The better an oil-importing country can position itself by floating its currency, tackling its twin deficits and having a stable government, the more readily it can reap the gains of cheaper energy prices.

Oil Imports 2014
  1. Source: www.bloomberg.com.
  2. Bloomberg: Crude Falls Below $30 a Barrel for the First Time in 12 Years, January 12, 2016.
  3. Source: U.S. Energy Information Administration.
  4. Wall Street Journal: U.S. Exports First Freely Traded Oil in 40 Years, January 13, 2016.
  5. Source: U.S. Energy Information Administration.
  6. IEA: Oil Market Report, December, 2015.
  7. World Trade Organization, International Monetary Fund World Economic Outlook October 2015, Dankse Bank "The Repercussions of the Oil Price Collapse: Themes and Market Views", January 11, 2016.

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