“Best two days in 3 years,” read a headline closing the final week before Christmas, an early gift for US equity traders – tonic enough for most to wash down the previous week’s tag: “Worst week in 3 years.”
On the back of this abrupt return to volatility, the time of year approaches where we must lick a finger and point it skyward, praying for direction as to the winds of 2015. We prepare for the events we know are coming and those we suspect will happen; elections and summits, the rise and fall of policymakers and corporate leaders, the evolution of economic and regulatory policy, mergers, deals and market turbulence.
But the real fun comes when a story catches us all by surprise. 2014 year had its fair share. Russia’s annexation of Crimea and war in eastern Ukraine, the rise and advance of the Islamic State and, perhaps more predictable, the descent into chaos of large parts of Iraq, Libya, and Yemen to join Syria on the failing state list.
The scale of Ebola in West Africa was a shock. No one predicted a halving in either the price of oil or the value of the Ruble. Vanishing euro zone growth and disinflation was an outside bet this time last year. Scotland came closer to independence than most had predicted.
If 2014 was anything to go by, the best advice may be to expect volatility to continue. On that note, we extend a thought to the factors affecting how the latest goliath mover will progress in 2015; that 42-gallon, $48 barrel of NYMEX crude, tumbling noisily down the hill, heavily clad in black and yellow, “handle with caution.”
Many countries, companies, investors and traders will be asking, most importantly, whether the collapse oil prices has bottomed out and, if so, how far crude might rebound in 2015. With the Saudis playing hardball and OPEC not scheduled to meet until early June, oil markets could remain oversupplied for some time.
Many in OPEC will want Riyadh to end its bid to squeeze higher cost producers and lead an earlier supply cut. So, with the cost of extracting oil through U.S. shale technology having fallen sharply, the speed and scale of the rebound will depend on how generous Saudi Arabia is feeling toward its fellow oil producers.
Among those hurting most are Iran and Russia, backers of Assad in the Syrian civil war, conflicting with the Saudis’ standing. Politics and oil may face ever-greater overlap in 2015.
Overall, reverberations of the slump should just be a transfer of wealth from producers to consumers – but the energy price plunge has already injected significant volatility into world equity and emerging markets.
Fallout stretches from the heavy haircut on market cap for the oil majors, suppliers and explorers, to already-developing currency, budgetary and debt crises in the big exporting economies.
Russia and Nigeria are deep into the throes of this and it could well get worse in both, as hard cash reserves in both drain away. The pressure on gulf countries will mount too – corporate debts in Dubai and elsewhere in the region could be the weak point that proves the ultimate motivator for OPEC’s Middle Eastern contingent to tighten the tap.
A wild card for some could be the pressure on long-standing dollar currency pegs in the Gulf. Nigeria’s election in February is another. The behaviour of sovereign wealth funds fuelled by oil windfalls is yet another side effect – both their local and international investment patterns will surely be affected and under intense scrutiny; where have they been big players and where could we see them forced to withdraw?
As above, one real surprise could be if our fundamental economics lessons bear fruit and the decreased price of oil spurs spending and distinctly unexpected growth in the euro area. This is certainly something that would be totally anti-consensus from a market struggling with deflation and stagnation. On an equity level, there will also be some significant winners – the airline and auto industry, most obviously.
From a corporate activity perspective, we can expect that once oil prices do stabilize, the pressure to maintain dividends will also force some of the less successful oil producers into the arms of rivals.
Ultimately, the oil shift has already caused a whirlwind of fallout in political and economic forums; expect the trend to carry to 2015. With governments and corporates keen to maintain a growth stimulus environment, don’t expect anyone to be intervening too eagerly.
