LONDON, Nov. 6, 2018
LONDON, Nov. 6, 2018 /PRNewswire/ --
When the spot price of Brent crude oil rose to $85/bbl in early October, discussion of oil at $100/bbl began in earnest.
In our view, higher oil prices reflect a variety of supply side and geopolitical uncertainties that have attracted speculative buyers into the market. It already seems that speculator interest is fading, and we are unsure now how much lower the price can fall. In this Spotlight we explore the effects of higher oil prices on emerging market economies and the costs of metal production. We also discuss our base case outlook for 2019 and explain why we expect lower, rather than higher, oil prices on the horizon.
$100 oil is an added burden for emerging market currencies
We have run a scenario showcasing the effect of a rise in the oil price to $100 /bbl in 2018Q4 that persists through to 2019Q4. The chart below illustrates how higher oil prices are likely to affect selected emerging market economies whose currencies have been under pressure recently. Since these economies are net oil importers, the higher oil price raises the cost of imports. If the economy has a current account deficit already, and relies on external funding, the additional pressure on the current account causes the currency to weaken further. As the currency weakens, foreign investors become wary and if they exit the currency, another round of depreciation follows.
Impact of higher oil price on metals: vary by metal and mine
Higher oil prices tend to push up on the costs of producing different metals, because they increase input costs through their impact on fuel costs (e.g. diesel and gas). This is largest for thermal coal conversion costs – the cost of transforming inputs into metal outputs – at 15% and smallest for aluminium smelting at 1%. There are also indirect effects, for example through power generation costs (e.g. electricity) where the impacts may be potentially larger. The chart below illustrates that power's share of conversions costs is largest for aluminium smelting followed by nickel, copper, lead/zinc and smallest for thermal coal. These metal exposures to oil are indicative in that they average across regions and mines. For this illustration, we have not included transport costs – which would have more influence on bulks. And we have not explored the broader indirect linkages between high oil prices and metal costs, e.g. through currency effects.
Supply constraints fuel potential for higher prices in Q4
Above, we have presented the results of the $100 oil scenario on EMs and the costs of metals production. In creating our base case forecast, we find that the key driver of oil prices will continue to be the supply and demand fundamentals.
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