Since oil has become a major macroeconomic factor and a key input to support GDP growth, but is currently is hard to predict, GDP growth is also uncertain. Key factors that may influence the oil price going forward are the effects of capital expenditure cuts in 2015, geopolitical risks, possible stagnation in Europe and Japan and production decisions by OPEC. If oil prices stabilize near current levels, then credit risk may increase causing assets to shift based on Fed actions like in the risk-on risk off environment post the global financial crisis. Given our economy is still in a post-global financial transition, it is highly sensitive to these factors.
According to the OMR, recent developments may drive more uncertainty about the supply and demand responses. Stronger-than-expected 1Q15 demand might signal a faster recovery – as would a faster-than-expected decline in North American unconventional supply. However, there may be a slower recovery if pockets of demand strength prove short-lived and lead to weaker deliveries later on. Geopolitics further call into question past working assumptions on future output, but may already have encouraged some producers to hike supply to stake out market share ahead of possible lifting sanctions. All in all, that suggests the market rebalancing may still be in its early stage.
One area of agreement in a world divided by oil importers, exporters, developed and emerging countries is there is an opportunity for energy reform from the oil price drop despite policy differences. Oil importers may benefit from the savings from the removal of energy subsidies that may be used to lower budget deficits and to increase public infrastructure. Developed economies may enjoy a boost to demand from the oil price drop but more monetary policy may be needed to prevent real interest rates from rising, especially if there are further declines in inflation. Infrastructure investment may help the need to support the recovery and long-term growth in these countries. On the other hand, macroeconomic policy to support growth remains limited in emerging markets, but in some cases, lower oil prices may alleviate inflation pressure and external vulnerabilities, thereby allowing central banks not to raise policy interest rates or to raise them more gradually. Some oil exporters may need to strengthen their monetary frameworks to avert the possibility that depreciation will lead to persistently higher inflation and further depreciation.