Oil price around $50 may stem US crude flow, boost global economy: Samba

According to Samba Financial Group, Brent may average $60/b this year, trending up over the medium term to reach $85/b by 2018

By Pratap John/Chief Business ReporterOil price around $50 a barrel should be enough to stem the flow of US crude, and should also provide a boost to global economic activity, a new report has shown. According to Samba Financial Group, Brent may average $60/b this year, trending up over the medium term to reach $85/b by 2018.“However, this forecast could easily be derailed by the lifting of sanctions on Iranian oil exports, and by advances in US drilling techniques, which could extend the US production horizon and reduce marginal costs,” Samba said.  Oil prices appear to have found a floor at around $50/b (Brent) down from last June’s peak of $115/b. The slump owes much to the perception that geopolitical threats are fading, but more fundamentally to supply additions in an environment of anaemic demand, the report said.Opec, Samba noted has backed away from any attempt to stanch this supply, calculating that any cuts would need to be deep to generate an adequate price response and would mean an unacceptable loss of market share. Opec members are therefore set to keep output high for the time being.“The global economy has had a rocky start to 2015,” Samba said. Deflation appears to be stalking not just the Eurozone and Japan, but much of the globe. This has roiled financial markets with equities being sold in favour of long-dated bonds, while traditional haven currencies such as the yen and the Swiss franc are back in favour, and even gold has made a comeback. Fears of a long period of deflation seem well grounded in the Eurozone, where structural factors are largely at play: years of wage compression and high unemployment, along with stagnant population dynamics have taken their toll on private consumption. The ECB has finally acted, announcing a €60bn-a-month programme of QE, which may or may not be enough to restore confidence and boost private spending. Japan, too, faces similar long-standing challenges, and the recent strengthening of the yen will not help its cause. In China, inflation is also falling quite quickly, and the rapidly coolingBut the deflationary challenge has probably been exaggerated in large parts of the globe. In fact in China, Samba thinks, there is ample capital, liquidity and moral suasion in the system to prevent a drift into generalised falling prices. Moreover, in many countries, disinflation is mainly a product of lower oil prices, which could well be a boon to domestic consumption. In oil-importing EMs in particular, where per capita oil consumption is high, falling petrol prices should stimulate demand, while also allowing governments to divert spending away from expensive energy subsidies towards more productive investment. Most importantly, Samba said global deflationary fears should be allayed by the robust US economy, which is now growing at a 3%-plus pace, with consumption supported by rapid gains in employment, signs of an uptick in real wages and of course lower gasoline prices. “US consumption is no panacea to the world’s economic problems, but it should remain an important and gathering tailwind,” Samba said.