BofAML: Petróleo vs Dólar (Global Energy Weekly)

Redacción - Viernes, 20 de Noviembre

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Global Energy Weekly: Saudi in a box: oil vs. USD •  If the CNY drops to 6.90 against the USD, as our FX team forecasts, downward pressure on commodities will build further • Should Brent drop to $30/bbl, the FX reserve drain on Saudi could accelerate to $18bn per month, adding pressure on the SAR • Continued USD strength could thus force Saudi to either depeg the SAR or to cut oil production and push Brent back to $50

Commodities are falling on weak global growth & inflation

Global nominal GDP in USD at market exchange rates has stagnated on weak growth, weak inflation, and a strong dollar. We see these trends continuing over the next year and believe macro dynamics will remain a huge headwind for commodity prices in USD. The strength of the US dollar is particularly concerning. As the Fed prepares to hike in December, the central banks of China, Europe, and Japan are all set to keep easing policy for some time. In a way, today's macro picture is a mirror image of 2007 (see China in a box: oil vs. USD). Our analysis suggests that: (1) the USD is far from historical highs and (2) the USD may continue to appreciate long after an initial contraction in US monetary policy. Put otherwise, too many commodities could keep chasing too few USDs.

If the USDCNY falls to 6.90, commodities will drop again

FX reserves across MI-BRICS (Mexico, Indonesia, Brazil, Russia, India, China, and South Africa) have kept on shrinking for months on de facto tighter US monetary policy, and the pressure on EM currencies has been relentless. Looking forward, we have long argued (see China's inconvenient truth) that if the CNY drops to 6.90 against the USD, as our FX team is calling for, downward pressure on commodities will build further. For oil, however, the most crucial point is what happens to the Saudi riyal. In fact, Saudi Arabia's FX reserves still provide an ample buffer, but they have been falling fast in the past year. Should Brent crude oil prices drop to $30/bbl, we estimate the FX reserve drain on Saudi could accelerate to $18bn per month, adding pressure on the currency.

Saudi may face a critical choice: cut oil supply or depeg

True, Saudi has been forcing oil prices lower by increasing oil production in an oversupplied market, and it has also rushed to issue debt in its local market to fill a soaring budget gap. Can the government maintain this dual strategy of flooding the oil market and draining FX reserves? In our view, it is unlikely that Saudi leaders would want to exacerbate the ongoing reserve drain by pushing Brent prices below $40/bbl. After all, pressure will quickly build on the riyal's 30 year peg to the USD if oil prices keep falling below the current levels. And frankly, it is a lot easier politically at first to deliver a modest crude oil supply cut than to implement a full-blown currency devaluation.

We see cases for both soft or hard-landing in commodities

Yet, a sharp CNY move could ultimately force Saudi's hand. A depeg of the Saudi riyal is thus our number one "black-swan" event for oil in 2016. So if Saudi opts to modestly cut supply to push Brent prices back above $50/bbl over the next year, EM growth could stabilize at these lower levels and eventually recover. However, if Saudi cannot resist the gravitational forces created by a persistently strong USD and depegs the SAR to follow the Russian or Brazilian currencies, oil could collapse to $25/bbl. Weaker commodity prices would in turn add more downward pressure on EMs. Thus, even if micro oil supply and demand dynamics continue to improve, the path for oil prices in 2016 will be closely linked to moves in the USD, CNY and SAR. Or to a last minute Saudi oil supply cut.

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