Four comments on the meaning of falling oil prices

Genevieve Signoret

Alternative Assets

1. China. Chinese credit flows continue to slow down. This is a good thing, not a bad thing; it can stave off an outright financial crisis in China. But it will probably also lead to a China slowdown more abrupt than the slowdown now foreseen by most analysts. This would add to downward pressure on commodity prices.
2. OPEC. Our reading of the latest OPEC decision is that Saudi Arabia and OPEC won’t cut production quotas in response to falling prices in the next two years.
3. U.S. oil and gas investment and production. Most of the industrial output recovery in the USA since the Great Recession can be explained by oil and gas drilling. And a good deal of U.S. fixed investment demand is being driven by this segment. Finally, we’ve seen research suggesting that drilling is highly responsive to energy prices and that the drop in demand is likely to occur earlier than the stimulus. These factors are causing us new concern for U.S. GDP growth and global energy demand and thus prices next year. But they also support our view that the drop in commodity prices will self-correct 3–5 years out: slower production and investment and higher consumer demand will render balances again tight.
4. Iran and Russia. A huge source of geopolitical uncertainty moving forward is how Iran and Russia will react to falling energy prices: fall to their knees and beg for mercy or become even more belligerent to distract their people?

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