We have forecast since mid-August that Brent oil prices would fall to “$70/bbl and probably lower”, and the US$ would see a strong rise. As Chart 1 shows, Brent has now reached our target, falling 40%, whilst the US$ has risen 10%. We believe this represents the first stage of the Great Unwinding of policymaker stimulus that has dominated markets since 2009. This Note now takes our oil price forecast forward into H1 2015.
Astonishingly, most commentators remain in a state of denial about the enormity of the price fall underway. Some, failing to understand the powerful forces now unleashed, even believe prices may quickly recover. Our view is that oil prices are likely to continue falling to $50/bbl and probably lower in H1 2015, in the absence of OPEC cutbacks or other supply disruption. Critically, China’s slowdown under President Xi’s New Normal economic policy means its demand growth will be a fraction of that seen in the past.
This will create a demand shock equivalent to the supply shock seen in 1973 during the Arab oil boycott. Then the strength of BabyBoomer demand, at a time of weak supply growth, led to a dramatic increase in inflation.By contrast, today's ageing Boomers mean that demand is weakening at a time when the world faces an energy supply glut. This will effectively reverse the 1973 position and lead to the arrival of a deflationary mindset.
1. Oil prices continue bouncing down the stairs to lower levels. Page 2
2. Financial players have destroyed price discovery in oil markets. Page 4
3. OPEC’s high prices have accelerated move away from oil to gas. Page 5
4. Gulf countries risk losing US defence shield if oil prices stay high. Page 7