–Barclays: Sees ‘Challenging Vulnerabilities’ For EMs From $100/bbl Oil
By Brai Odion-Esene
WASHINGTON (MNI) – Tight oil market conditions, fueled by the
conflict in Libya, mean further increases in oil prices should be
expected, Deutsche Bank analysts said Friday, while analysts at Barclays
warn that such a rise would pose significant risks to emerging market
economies.
An average annual oil price above $100 per barrel would result in
“challenging vulnerabilities” in emerging market economies such as
India, Barclays analysts wrote in a research note.
In its weekly commodities report, analysts at Deutsche cautioned
that, “In our view, the military situation in Libya threatens to devolve
into a protracted stalemate with a growing potential for damage to oil
facilities.”
As a result, “We believe Libya is out of the markets for the
medium-term.”
They went on to describe underlying oil supply and demand
fundamentals as “tight,” due to inventories that are trending down and
the squeeze on spare capacity.
“This portends a continuation of further advances in the oil price
in our view,” the Deutsche report warned.
At time of writing WTI NYMEX was trading at $111.66 on the day and
in a range of $110.32 to $111.68.
Barclays analysts warned that a jump in the oil price to $150 per
barrel in the second quarter of this year would result in an increase of
up to 4.5 percentage points and 2.7 percentage points in emerging market
and advanced-country inflation, respectively, and a drop in global
growth of 0.75 percentage points.
“Moreover, an average annual oil price north of $100/bbl could
create challenging vulnerabilities in relevant EM economies such as
India, and generally widen global imbalances,” they wrote.
Policy challenges may be especially significant in nations already
facing above-target inflationary pressures or where labor and goods
markets have not yet recovered well from the global crisis, the Barclays
analysts said. “Indeed, policymakers would face the typical trade-off
posed by supply shocks, which are by nature both inflationary and
contractionary.”
Barclays analysts, however, do not foresee a repeat of the 1970s
hyperinflation, arguing that oil would need to reach at least $200 per
barrel “to deliver a price increase of a similar magnitude to the two
experienced in the 1970s.”
In addition, policy credibility is much higher today in both
advanced and emerging economies, Barclays said. This helps contain the
secondary round inflationary effects of the oil shock, which worry
policymakers the most.
Also, the amount of energy consumed as part of economic activity
has declined in the advanced world, Barclays noted, resulting in a
smaller output and inflation effect in developed countries.
As for current impact inflation from energy prices, Barclays noted
that some policymakers — like those at the Fed — “may continue to
argue that they should not react to the inflationary effects of
temporary energy shocks.”
Meanwhile others, such as European Central Bank officials, “may
fear that the second round effect of such shocks may harden into higher
inflationary expectations, which would be much harder to eradicate
later.”
These differing points of view on inflation between two major
central banks were played out in the news cycle Friday, notably in
remarks by Atlanta Fed President Dennis Lockhart, and ECB Executive
Board member Gertrude Tumpel-Gugerell.
In a speech in Knoxville, Tennessee, Lockhart predicted “the
composite of inflation measures will level off around a rate consistent
with the Fed’s price stability mandate.”
Elaborating, he reiterated his expectation that “commodity price
increases that are now translating into accelerating headline inflation
will be transitory.”
“Looking ahead, this is not to say there will be no pass-through
effect on inflation,” he said. “The point is the effect is likely to be
muted.”
However, speaking to reporters on the sidelines of a German-Spanish
conference in Berlin, ECB’s Tumpel-Gugerell argued that there are signs
that inflation expectations in the Eurozone have picked up recently.
“It is important to avoid second round effects now,” she said,
adding, “It is very important to monitor inflation expectations, where
we saw some signs of an increase recently.”
“We have seen a cost push, and monetary policy has to act
preemptively,” the Executive board member said, adding, however, that
the ECB never pre-commits on future interest rate moves.
Barclays said policymakers can use both fiscal policy to contain
the contractionary effect of the energy shock and monetary policy to
tackle inflation.
Its warned, however, that the extent to which they can do this
“depends on the effects of the oil shock on the individual country, the
state of public finances, and the scope for monetary expansion.”
Already, Barclays analysts noted, several countries have little
fiscal space left after the massive levels of public spending to combat
the global recession, not to mention the incoming expenditures
associated with an aging population.
Still, Barclays said that, for most countries, the size of the
negative growth effect from the oil shock would not require a fiscal
intervention large enough to bring debt into unsustainable levels.
** Market News International Washington Bureau: 202-371-2121 **
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