Economic boost from lower oil prices muted: IMF

OREANDA-NEWS. July 16, 2015. Economic headwinds have muted what should have been a 0.5pc boost to global growth in 2015-16 from last year's steep drop in oil prices, the IMF concludes in a new staff report.

The report, entitled Global Implications of Lower Oil Prices, also said there were no clear evidence that speculative investing or financialization of crude was making oil prices more volatile or driving them down.

Macroeconomic models would suggest that lower oil prices would translate into higher spending by oil importers that exceeds the drop-off in spending by crude exporters. But the IMF report notes that other factors have been at play in the global economy over the last year. Russia, for instance, continues to feel the effects of sanctions imposed in the wake of the conflict in Ukraine. China continues to experience decelerating growth, while conflicts in the Middle East have intensified.

The IMF on 9 July revised downwards its forecast for global growth this year by 0.2 of a percentage point from an April projection to 3.3pc.

Supply factors, including higher production from US shale formations and stronger-than-expected output from Iraq, Libya and Saudi Arabia, played a bigger role than demand in driving the 50pc drop in oil prices from mid-2014 to early 2015, the report said.

When that happens, "adverse demand factors can broadly offset the positive impact of the oil supply shock," the report noted. Even in relatively oil-intensive economies, the positive effects of even significant price declines for oil importers is small, since oil's share in total expenditures and costs is relatively modest.

The lower oil prices also have not fully made their way through to consumers. An analysis of retail price data suggests the median pass-through to gasoline and diesel prices was about 50pc in the second half of 2014. That is similar to the 40pc pass-through seen in the second half of 2008 after the price collapse that year. Economies in the Middle East and sub-Saharan Africa, where fuel prices are more likely to be regulated, have had the lowest pass-through.

In some oil importing countries, the positive effects of lower prices has been muted by exchange rate depreciations and lower commodity prices in other sectors.

Futures markets suggest Brent prices will rise to about \\$75/bl in 2020. While the price outlook is uncertain, "a substantial part of the oil price decline is expected to persist into the medium term."

IMF staffers are developing a supply-demand model for predicting oil prices that weighs the gradual depletion of convention oil stocks against new discoveries and demand trends. "It predicts rising oil prices over the medium term, so that sufficient investment takes place to expand supply capacity to meet growing demand."

The speed and magnitude of the oil price decline has the potential to trigger financial strains that could reduce the global benefits of oil prices. The IMF says the effects have so far been contained, but that may not have yet been realized. Many energy companies have accumulated sizeable amounts of debt, while some banking systems have seen a marked increase in loan exposure to the sector.

The role of noncommercial players in the oil markets has been a subject of much debate in recent years. The IMF report said despite the surge of new, noncommerical investing in oil, it didn't find clear evidence of speculation or financialization increasing price volatility or driving the price decline.

The report pointed to "an unusual degree" of divergence between oil prices and energy company stock prices in late 2014. But the net long position of speculative participants increased even as prices continued to fall.

"This suggests that, at least during this episode, investors' financial flows were not driving the direction of oil price swings," the report said.