Oil price falls will benefit markets in 2016, says ETF issuer Source

Jan 5th, 2016 | By | Category: Commodities

Despite the negative fallout from plummeting oil prices, the net effect will be positive for markets and the global economy in 2016, according to Source, one of the largest providers of exchange-traded funds (ETFs) in Europe.

Oil price falls will benefit markets in 2016, says ETF issuer Source

London-headquartered Source manages just shy of $20bn in ETFs assets.

Paul Jackson, Head of Multi-Asset Research at Source, commented: “Based on recent evidence it seems that markets prefer an elevated oil price. However, this should not be the case. Of course, low prices cause distress for oil producers and their suppliers but everybody else benefits. For example, the fact that in the first 11 months of 2015 China imported 9% more oil than the preceding year but has paid 41% less for it means that there has been an enormous transfer of spending power to China.”

Jackson says that consumers, corporates and governments benefit from lower commodity prices generally.

He added: “If 2015 was the year falling commodity prices inflicted pain on a small number of economic agents, perhaps 2016 will reveal the slow-burning positive effects for the rest of us and we assign a probability of 25 percent to an outcome we call ‘benign deflation’, whereby low commodity prices will depress inflation and boost economic growth. Judging by the acceleration in Chinese retail sales throughout 2015, this could already be having an effect.”

Source includes a $20 oil price among its list of ‘improbable but possible’ events for 2016. The company’s analysis shows that when expressed in 2015 prices, US oil has been in the $20-$60 range in four out of every five months since 1870. Whenever it goes significantly above that range (as it does in every three of four decades, on average) then falling demand and rising supply drive it down again. When it does fall back it goes all the way to $20, undershooting ‘normal’ levels in order to bring about the necessary supply adjustments.

Source’s 2016 list of “Improbable but possible” market events include:

  1. Oil goes below $20, copper goes below $3000 and gold sinks to $700
  2. China surprises on the upside, thanks to operations by the People’s Bank of China and cheap oil
  3. The Japanese economy accelerates; the yen rises
  4. Brazilian government debt is a star performer
  5. Rising core inflation forces rapid Fed tightening and 10 year yields approach 3.5%
  6. German members of the ECB council revolt against Draghi and European bond yields and the euro rise
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