Home' Trinidad and Tobago Guardian : August 6th 2015 Contents The double dip oil decline
is here. On radio and tel-
evision interviews in
October and November
last year I suggested that,
at some stage, the oil
price decline would level
off, rebound and then oil
prices would decline again. I gave a timeline
for that double dip to be somewhere around
May/June of this year.
I was off by about a month or so but that
double dip is now here. Anyone who follows
a market will appreciate that prices do not
generally move in a straight line. At each price
point there is a dynamic between buyers and
sellers, between supply and demand that deter-
mines whether the price trend continues or
In the case of a commodity like oil, there
are leads and lags in terms of the requirements
of the providers of capital and the establish-
ment of production levels and these take time
to play out. That time line usually makes the
move in a commodity more extended than a
move in, say, a stock on an exchange. The
fundamentals of the oil, and for that matter
the energy markets (including natural gas),
are changing and we would do well in T&T
to try to understand those changes as opposed
to trying to predict prices.
Back in late 2014 the discussion was all
about how low can oil prices go and trying
to pick the bottom. I always pushed back
against that debate and still do. The bottom
line is that oil prices will go as low as it needs
to go in order to spark a rebound in price.
That is the way market dynamics work.
What is more important than the actual
bottom of the market is the vector or the
direction of prices and the length of time that
prices are likely to move in that direction. Vec-
tor speaks to magnitude and it should be clear
that the magnitude of the move in oil prices
(over 50 per cent down) is quite significant.
Oil prices started to fall around this time last
year but, even within this calendar year, the
volatility in prices from the rebound to the
double dip is in the region of 25 per cent.
I would suggest that the direction of the
price move is lower for longer. Many were
suggesting last year that after the shakeout in
the market, oil would begin to firm up and
rebound towards the latter part of this year.
The reality: there are many different catalysts
at play but the base line scenario I would
advocate is that prices will stay lower for longer
than was originally expected. That base line
can be impacted by some exogenous shock,
especially one emanating from the very volatile
Middle East and North African region but
these are not scenarios that you seek to base
economic and financial decisions on unless
you are wont to speculation.
Lower for longer
Lower for longer means that we must have
a fundamental rethink of our economic policies,
our priorities and the pace at which we seek
to diversify the local economy. We continue
to hang our hat on foreign direct investment
in the form of industrial plants that use our
energy reserves to engage in downstream pro-
duction for exports. This is the Point Lisas
Reflect on the number of plants that have
been proposed and promised over the past 15
years and consider how many have come to
fruition. We have had everything from natural
gas to liquids, ethanol, iron and steel plants,
ethylene, plastics, aluminum plants, more
methanol plants and the list goes on. How
many have actually come to fruition? Ask
yourself why? Yet we continue to see prom-
The overall point is that the world has
changed but our thinking remains rooted in
what worked for us in the 1970s. It was back
in 2006 when our national spending was get-
ting into the danger zone that I warned that
the reserves to production ratio for natural
gas globally was at 60 years. That was at a
time when we got zero bids for exploration of
new acreage in our attempt to develop our
natural gas reserves.
The simple point then: there was increased
competition to house these industrial com-
plexes around the world and many are at this
time better positioned than T&T. Pay attention
to the dynamics in the US Gulf Coast. There
you had access to abundant oil and gas supplies
and a stable and progressive environment for
capital. Add to the mix a cheap and abundant
source of labour across the border in Mexico
and the scale of the challenge we face to attract
quality projects to our shores should be evi-
The bigger issue can once again be tied back
to global dynamics. If one were to step back
you will realise that it is not just oil but the
entire commodities complex is in a downward
trend. Base metals such as copper, nickel, tin
are all down around or about 20 per cent year-
to-date. The decline in base metals coupled
with the soft oil market speaks to an overall
decline in industrial production on a global
This is consistent with a theme I have been
advocating for many years. That is, the
prospects for global growth in the post crisis
scenario have been overestimated and each
year we have seen downward revisions to
global growth forecasts. This is the fundamental
reason why globally interest rates have stayed
low for as long as they have.
The point is worth repeating as it gives a
context to what is taking place currently.
In the decade 2001-2010 all commodities
from gold to oil to copper rallied on the back
of significant demand from emerging market
economies. The way the global economy is
structured, credit is the lifeblood and so the
expansion of that decade was fuelled by credit
in one form or another. Capacity was developed
to meet with the trajectory of demand growth.
Eventually that credit cycle collapsed on
itself in the form of the 2008 financial crisis.
As credit dried up demand collapsed and it
has taken years to kick start the growth cycle.
Appreciate that 100 per cent of the demand
growth in metals over the past 10 years came
Today, China is facing economic challenges,
as it must. No economy goes straight up over
a multi-decade period.
Yet, the capacity remains and this means
there is the potential for oversupply, which
creates downward pressures on prices. I point
to a statistic first published by Bill Gates. He
pointed out that China used more cement in
the period 2011 to 2013 than the United States
used in all of the 20th century.
While this statistic is stunning, it can be
rationalised, but the point to appreciate is the
extent to which China has contributed to global
demand even after the financial crisis. With
a China slowdown others will have to pick up
the slack. Some have pointed to India but with
an income per capita one fifth that of China
they cannot substitute for any fall off in Chinese
The oil market turned because low rates in
the US allowed for risk capital to be allocated
to risky shale ventures at an affordable price
point. This resulted in an increase in supply.
As OPEC, led by Saudi Arabia, maintained its
supply levels, prices began to decline on the
back of surplus supply.
These declines were exacerbated by the
strengthening of the US dollar, as other global
economies---in particular Europe and Japan---
were weaker relative to the US. As we go for-
ward, the dynamics will likely flip. Demand
will remain tepid and so supply will have to
fall further to create equilibrium.
As the US Federal Reserve is set to increase
rates in September and the US economy sta-
bilises at a growth trend in a two per cent
handle, the US dollar is likely to appreciate
further against world currencies. That speaks
to continued weakness in oil prices and com-
modity prices, in general.
Let me be clear that the term "weakness"
is not a prediction of further price declines
but rather it is a suggestion that we are unlikely
to revert to the days of US$90-US$100 oil
anytime soon. That means we have adjust-
ments to make in T&T.
Lower for longer should be the base case
for our medium-term planning horizon.
Ian Narine is a broker registered with
the SEC and can be contacted at ian.nar-
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 6 • 2015
The oil bust
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