Monday, August 8, 2016

One Transmission Channel Between Oil Prices and Capital Markets

WTI $42.63 up 0.83; Brent $44.82 up 55 cents.
From FT Alphaville:

Of $40 oil and forced SWF selling
You know who doesn’t like a falling oil price? Sovereign wealth funds for countries dependent on high oil prices and in love with their (endangered) petrodollars.

And a risk based on that dislike is a presumption of forced selling and equity market weakness becoming self-fulfilling as/ if oil prices slide. Stable oil prices means SWFs don’t have to suddenly liquidate but the opposite would also seem to be true…

The last time JPM’s Flows & Liquidity team looked at this risk they based it on a fall in Brent to an average price of $45 per barrel.

They now assume an average oil price of $40 for 2016 and also note that the “YTD average has already fallen to $42.”

As they say, with our emphasis:
  • In our previous analysis based on a $45 average oil price for 2016, we projected the current account balance for oil-producing countries to worsen from around -$70bn in 2015 to -$140bn in 2016. This estimate is based on the same sensitivity of the current account balance to the change in oil prices as last year, i.e. between 2014 and 2015. However, the depletion of official assets could be higher than the current account deficit if these countries also experience capital outflows as it happened last year. If we assume $80bn of capital outflow for 2016, the same level as last year, we project a depletion of $150bn in FX reserves and a depletion of $50bn in SWF assets....