Cheap energy to aid manufacturing sector

Markets will only pick up once major manufacturing economies, particularly in Asia, feel the benefit of cheaper energy.

By (Reuters)

Published: Fri 9 Jan 2015, 1:14 AM

Last updated: Thu 25 Jun 2015, 7:52 PM

Singapore — Oil prices will continue to drop as high production meets weak demand and a strong US dollar pressures crude, and markets will only pick up once major manufacturing economies, particularly in Asia, feel the benefit of cheaper energy.

“The risks to oil prices remain skewed to the downside in the near term,” ANZ Bank said. “(US) shale producers won’t start feeling the pinch for another six months. In addition, there is the prospect of further supply increases from highly stressed Opec members such as Libya, Nigeria and Venezuela, which could place further downward pressure on prices,” the bank added.

There’s also more oil in the system as slowing economies are using less and as energy efficiency improves. In Asia, Japan is battling recession, while in China, demand is slowing as the economy shifts from energy-intensive construction to consumer-fuelled growth.

Citi this week predicted China’s crude oil imports would grow more slowly this year, adding that “anyone hoping for China to drive a rebound in oil prices is likely to be disappointed.” Adding to the slack in Asia is that Europe has yet to recover from its post-credit crunch crisis in 2008-09.

Another drag on oil comes from the dollar. With the US Federal Reserve expected to raise interest rates this year for the first time since 2006, the dollar is likely to keep strengthening, putting more pressure on oil markets as European and Asian currencies fall.

While the immediate outlook for oil remains weak, analysts say cheaper fuel costs for households and businesses should at some point support demand, especially in manufacturing-led economies.

“The collapse in oil prices looks set to wipe out the Gulf’s external surpluses next year, leaving China and the eurozone as the world’s major surplus economies,” Capital Economics said in December.

Citi noted that lower oil prices could save China more than 1 per cent of GDP on imports, helping boost consumption.

In Japan, cheaper fuel costs will not only benefit large industry, but also help reduce a deficit, triggered by soaring fuel imports following the shutdown of its nuclear power plants after the 2011 Fukushima reactor meltdown.