Since the 1990s, oil prices have spiked above $100 per barrel only a handful of times. Once in the beginning of 2008, and for a longer stretch between 2011 and 2014, with a short reversal in 2012. In the past seven weeks, the price of Brent crude has risen 18 per cent on supply concerns triggered by looming US sanctions on Iran, the collapse of Venezuela’s economy and bottlenecks building in the US shale industry. It now sits near a four-year high of $85 a barrel, prompting bets that triple-digit prices could soon be around the corner.
Emerging markets across Asia tend to suffer the most when oil surges. Advanced economies are not immune, and for the largest oil importers, consumption tends to fall. Unsurprisingly, higher prices are good for producing countries like Norway, Canada and Brazil. What is surprising, however, is that in the last year or so, despite the rally, these countries have eked out lower gains than in the past.
According to Citi’s Johanna Chua, Asian countries suffer the most when oil prices rise because, aside from Malaysia, most are net oil importers. Singapore runs a sizable 6.5 per cent oil and gas deficit, followed closely by Pakistan, Thailand, Sri Lanka and Taiwan. Indonesia and Vietnam manage slightly smaller deficits of roughly 1 per cent.
Given this exposure, many of these economies see the largest inflation swings when oil prices rise. Here’s one of Chua’s charts ranking the sensitivity regionally over the past six years. Sri Lanka, the Philippines and Vietnam lead the pack, with Thailand, India and Taiwan rounding out the top six:
On the export front, Taiwan, Korea and Thailand are forecast to weather the biggest declines should oil prices rise $10 a barrel. Krystal Tan at Capital Economics calculates that Hong Kong, Sri Lanka and India may see sizable declines as well, while Malaysia and Indonesia’s net exports are set to rise as a percentage of GDP:
Take this all together and the broader outlook for emerging markets does not look too bright. Here’s Chua:
EM Asian markets are in a difficult spot owing to the coincidence of the oil supply shock with a strengthening dollar, rising US yields, and amid a deteriorating EM growth differential with the US. Unsurprisingly, this results in weaker Asian currencies and higher yields, and continuing risk aversion for EM investors. Despite EM valuations having already cheapened this year, in some instances quite substantially, these persistent headwinds suggest that further cheapening should remain the base case view.
Some advanced economies face many of the same pressures. For Bank of America Merrill Lynch’s Ethan Harris, Japan, Europe and the UK are “clear losers,” with growth there coming under pressure by 0.2 to 0.5 percentage points next year. Not only do all three import their oil, but also, households in Europe and the UK save little, leaving them with smaller nest eggs to buffer price increases.
In terms of what those price increases could amount to, Simon MacAdam at Capital Economics calculates that, should Brent crude prices remain at $100 per barrel through 2019, consumers in major advanced economies would see fuel consumption costs eat up an additional 0.3 per cent of their annual household spending. Headline inflation, he finds, would rise a percentage point or more as well, though that increase may be offset slightly by the somewhat-higher wage growth reported in most of these economies.
These countries obviously benefit the most when prices cross that triple-digit threshold, but since late last year, their gains have been more muted than past price run-ups. Daniel Hui and a team of strategists at J.P. Morgan Securities find that petro currencies like the Norwegian Krone, Canadian dollar and Mexican peso are underperforming oil prices by an increasingly wide margin. The gap now sits at 17 per cent, as the following chart shows:
And here’s another from Hui highlighting the degree to which specific oil-producing countries have undershot crude prices. The Russian ruble and Brazilian real have fared the worst at 26 per cent and 24 per cent, respectively, followed by the Mexican peso at roughly 15 per cent:
The slowdown in global growth shoulders much of the blame. Today’s oil surge is driven not by excess demand, but too little supply. And in recent months, global PMIs have fallen to their lowest levels in two years as exports worldwide have contracted. In fact, the gap between global growth and Brent crude mirrors the underperformance seen above between oil prices and petro currencies, per Hui:
Some of these supply concerns may be easing, however. Just yesterday, Brent crude slipped to $83 a barrel on news that the White House may waive sanctions on some countries importing Iranian oil. That’s a sharp reversal from the Trump administration’s previous stance that “Individuals and entities that fail to wind down activities with Iran risk severe consequences.”
$100 oil hinges on whichever policy wins out.