Oil plunge could help some emerging markets

While the fall in oil prices does not yet match the 2014-2016 slump to US$26 per barrel, the current decline should soon make itself felt through the global economy.

The international crude benchmark, Brent, has fallen under US$65 per barrel from a four-year high in early October of more than US$86, and US crude has dropped to around US$55 a barrel.

Along with the United States and Russia, Saudi Arabia boosted oil production in anticipation of sharply lower exports from Iran, due to pending US sanctions. But the Trump administration added a six-month waiver for several countries that are major consumers of Iranian oil when he imposed the sanctions on November 5.

Instead of spiking, oil prices have slumped. Concerns about slowing global growth and weaker demand have also weighed on prices.

It's likely Saudi Arabia and OPEC will take actions to raise prices. Analysts at Commerzbank expect OPEC and some non-OPEC countries to agree to a production cut of at least one million barrels per day at the cartel's next meeting on December 6 in Vienna.

"We see the oil market as being in a phase of exaggeration and expect a noticeable price recovery after the OPEC meeting at the latest," the analysts wrote.

The drop in oil prices isn't all good news for the US economy, now that the nation has more than doubled its production of oil over the last decade. The price decline could lead to less investment in new rigs in oil-producing US states, offsetting the overall impact on economic growth.

"Lower oil prices are now a net drag on the US economy. This is a huge break from the past," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Shepherdson said the oil price drop would soften growth "at the margins" as the US slows once the boost from recent tax cuts fades.

The economic impact is also different this time for Russia, which fell into recession after the last oil slump. Analysts say the country, a major oil and gas producer, is more insulated from a market drop because it has found ways to balance the state budget at lower oil prices. That's one reason Russia has been pumping oil at top speed recently.

The IEA says abundant global oil supplies should be welcomed as insurance against market volatility. It says lower prices are also a big break for people in developing countries who have seen fuel prices rise due to a stronger US dollar, the currency oil is denominated in.

The US oil contract traded at US$55.55 a barrel in midday trading in the US on Wednesday, up US$2.12, or four per cent. Brent crude was at US$64.22 in London, an increase of US$1.69.

AP