On Monday, oil prices fell by nearly 30% following Saudi Arabia’s decision to increase its oil production by 1.5 million barrels per day, which surprised markets as they had anticipated that OPEC and Russia would cut output. The decision to dramatically increase it instead is an explicit attempt to drive higher-cost oil producers out of business. Investors need to be prepared for an extended period of low oil prices: in 2014, Saudi Arabia pursued a similar strategy and it took nearly two years for OPEC to eventually agree on production cuts to bolster the price.
This will have significant implications for the global economy. For oil-producing countries, energy-related investments will decline substantially and their currencies will continue to weaken as their terms of trade worsen. Energy importers will benefit from lower oil prices, but amid heightened risk-aversion any savings are unlikely to be spent. Meanwhile central banks will maintain a loosening bias, because lower oil prices will reduce core and headline inflation rates around the world.
Peter Kinsella
Global Head of Forex Strategy
Koon Chow
EM Macro and FX Strategist