OPEC Preview Do falling petrodollars mean more QE

The last time oil prices plummeted 30% in less than five months was in March-June 2012, coinciding with a period of a rising US dollar and the most recent episode of the Eurozone debt crisis. Three months later, the ECB announced its readiness to do QE, and three months after that the Fed started QE3. Today, oil prices are 30% lower than five months ago, and calls for ECB QE are louder than ever, while the Fed has just ended its own stimulus measures.

Will OPEC need its own QE?

Thursday’s OPEC meeting is most likely to produce a maximum cut in the range of 0.5 to 1.5 million barrels a day. With oil falling almost a third over the last five months, one question arising is the extent to which the Gulf nations’ sovereign wealth funds will reduce their purchases of global assets.

Since it’s no secret that Gulf SWF’s confident participation on the global scene emerged in 2007-2008, at a time when oil prices hit record levels, could we assume that falling petrodollars from prolonged oil weakness (sub-$90 in Brent) into the next 12 months would lead to a scaling down of SWF investments? And does slower SWF accumulation in global markets, combined with the end of US QE, imply a diminishing in the stimulative effect of Japanese QE and later ECB QE?

In as much as falling oil prices are considered a tax cut for oil-consuming nations, their potentially dilutive impact on global equities from Gulf nations should be noted

More from the BoE on Tuesday

GBP-watchers await Tuesday’s testimony from Bank of England Governor Mark Carney to the UK Parliament’s Treasury Select Committee, shedding further light on last week’s dovish inflation report. MPC member Ian McCafferty will also speak at tomorrow’s hearing. Note that McCafferty is one of the MPC’s two hawkish dissenters (the other is Weale) who voted for a 25-bp rate hike over the last four meetings. But speeches from Deputy Governor for Financial Stability Jon Cunliffe and MPC member Kristin Forbes (both doves), could help offset any hawkish pronouncements from McCaferty. Recall that Carney said in an interview last week the UK has “huge disinflationary forces coming” from its trade partners.

The spread between UK and US 10-year yields has pushed to 0.27%, its highest level since August 2013. Interestingly, even the EU-UK 10-year spread has risen in favour of the Eurozone, hitting a three-week high at -1.10%. The fact that gilt yields have outperformed their German counterparts over the past week highlights the dovish momentum priced in gilts relative to bunds, all courtesy of the shift in the BoE’s inflation report.

GBP bulls riding the Monday rally ought to beware of another mid-week massacre.

The five-month decline in brent oil is the longest losing streak for the fuel since the 2008-9 crisis, when it fell 75%. For oil to avoid a decline above $70 next year may be a positive, but for the price to remain below $80-85 could impact liquidity, but this time from SWF’s demand rather than that of the consumer.