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“Pipe Dreams” Of A Gently Rising Oil Price

What does the world really want from oil prices? There are conflicting views, but, as Bloomberg’s Mark Cudmore notes, ultimately a stable and slowly appreciating oil price is probably best.

It’s quite clear from price action that financial markets are keen to see oil bounce. Crude (with the yuan) led the early-year rout before spear-heading the broad relief rally last week. And its capitulation yesterday has snuffed out animal spirits globally.

But, it’s important to remember that financial asset performance isn’t everything. It’s generally assumed that cheaper oil is positive as it boosts consumers’ disposable incomes, broadening consumption and spurring the real economy.

As Citigroup’s head of emerging-market economics David Lubin wrote yesterday, cheaper oil may in fact hurt more than help emerging-market crude importers. His argument is that the retrenchment of petrodollar investment in developing economies may outweigh their savings from cheaper energy bills.

That may explain why we’ve yet to see a large economic boost after 18 months of falling petrol prices. And it’s another reason to support the plea from financial markets that we really don’t want oil prices to keep falling.

But that doesn’t mean the world needs a steep oil rally. Not only would that provide a new negative shock for the real economy, but developed-market central bankers might suddenly find themselves with a lot more of the recently-elusive inflation than they’ve been hoping for.

Base effects would exacerbate this problem and global markets might then be fighting an upward battle against quickly tightening monetary policy.

So stability is the target. Or perhaps, as is the desired state for prices more generally, a gradual appreciation — ideally at a pace that’s just enough to support energy investment and capital flows.

That seems a pipe dream right now when Brent crude has moved by an average of 7.8% a week since the start of December…

Crude Oil Price Slide

For now it appears neither “stability” nor slow and gentle appreciation are on the cards.

Source: Zero Hedge