When it comes to US interest rates, the level of analysis seen this week can almost be classified as mind-numbing. You have heard the themes time and again: It’s the first move higher on rates in nearly a decade; a big threat to emerging markets with high current account deficits and a so-called end to easy money.
I see it quite differently. Aside from slightly less than clear guidance back in September, the US Federal Board Chairwoman Janet Yellen managed expectations well. Instead of a long cycle of interest rate increases to stem rising inflation, many are suggesting the hikes could be over and done with by mid-2016, just in time for the Fed to steer clear of America’s rough and tumble presidential election in November.
That is the view of Marios Maratheftis, Global Head of Research for Standard Chartered Bank, who declared in a recent blog, “So, expect moves. But do not get carried away in the paranoia of doom and gloom.”
If his outlook proves to be true, should the world really be that concerned with interest rates topping out at 1 per cent? Probably not, and that is why I am suggesting investors would be best served watching oil prices — not interest rates — next year.
Even as oil hovered right near an 11-year low, none of the major oil producers are providing indications of letting up ... in fact they are digging in their heels. Let’s look at the two largest exporters: Saudi Arabia and Russia. Both continue to produce around 10.5 million barrels a day and they are planning for lower oil prices being with us for longer.
Sometime in the next week, we will see the first budget from King Salman and his all-powerful Deputy Crown Prince, Minister of Defence and Chairman of the Council of Economic and Development Affairs, Mohammed bin Salman.
After having burnt through about $80 billion of reserves, indications are King Salman will rein in spending and at least trim subsidies in his first official budget since assuming the throne last January.
Meanwhile, Russia’s President Vladimir Putin, who is locking horns with Saudi Arabia for global market share, is planning for oil to stay as low $40 a barrel until 2022. Putin’s Deputy Finance Minister Maxim Oreshkin mapped out the Kremlin’s belt tightening plan last weekend suggesting to those attending a forum in Moscow “We will live in a different reality.”
As a result Russia’s economy is poised to fall as much as 4 per cent in 2016.
The clash between Opec and non-Opec titans will only add to record crude reserves. The International Energy Agency, the Paris based think tank of energy consuming nations, is forecasting that another 10 per cent will be added to reserves already at a record 3 billion barrels.
This emphasis on market share at the expense of prices could have a more destructive employment and investment impact than higher US interest rates. The consultancy Graves & Company has tracked 250,000 jobs being wiped out in the energy sector this year and 300,000 more expected next year as capital expenditures are forecast to be down by $320 billion in 2016.
Not too surprisingly, regional equity markets are pointing to more economic turbulence to come. The Dubai Financial Market is down 18 per cent in the past quarter and Qatar fell 10 per cent the last month alone.
The less than rosy scenario is certainly not derailing plans for Iran to re-enter the market in a sizeable fashion if sanctions are lifted as many expect in the front half of January. Back in September, Petroleum Minister Bijan Namdar Zaganeh told me they will not be denied their right to regain market share lost during eight years of sanctions.
The plan is to add up to one-and-a-half million barrels a day by December 2016.
In terms of Opec’s 55-year history, December was marked by internal dissension and defined perhaps as every country acting for themselves. Just a few months ago, Minister Zaganeh told me it was time to bury old rivalries.
“We think with all the difficulty that we had, it’s in the history of Opec that we should cooperate with each other and to go ahead with each other,” he said, as a founding member of the organisation in 1960.
But that spirit of collaboration seems to be lost in the haze of a better than $75 a barrel correction in prices. Like Saudi Arabia and Russia, Iran is planning for lower oil prices for longer.
It is a theme that will dominate the narrative next year and likely drown out today’s concerns about US interest rates.
The writer is CNN’s Emerging Markets Editor.
