Warnings as oil prices fall

The price of a barrel of oil could remain low for several years. Photo by Reuters.
The price of a barrel of oil could remain low for several years. Photo by Reuters.

Oil prices fell to new six-year lows in New York yesterday, despite warnings the low price meant shrinking investment into exploration, which could lead to significant price increase in the future.

United States benchmark West Texas Intermediate for March delivery lost US44c to finish at $US45.15 ($NZ60.80) a barrel.

In London, Brent North Sea crude for delivery in March fell US63c to $US48.16 a barrel.

US Vice-president Joe Biden told a Caribbean energy security summit global oil prices were likely to remain ''relatively low'' for at least the next several years.

Oil prices have fallen nearly 60% since June on global oversupply.

According to reports, Opec secretary-general Abdullah El-Badri warned falling exploration and production investment could result in curtailed output several years in the future, forcing prices to $US200 a barrel.

However, he put no timeline on the warning and analysts said there was little sign that would be the case.

ASB chief economist Nick Tuffley predicted this year would be busy for central banks and oil prices were part of the reason.

The European Central Bank's meeting was always going to be a big event but last week turned out to be action-packed with developments and news from other central banks on top of the ECB news.

On top of the ECB's asset buying programme, the Danish Nationalbank and the Bank of Canada unexpectedly cut their official lending rates.

The Bank of Canada had left rates unchanged at 1% since 2010 and the 0.25% cut took the market by surprise, he said.

The Bank of Canada said the decision to cut rates was in response to the recent sharp drop in oil prices, which would be negative for growth and underlying inflation in Canada.

After the surprise move from the Swiss National Bank to abandon the Swiss franc cap against the euro earlier in January, the Danish krone's peg to the euro has been in the spotlight.

The Danish Nationalbank cut its main interest rate twice last week, and intervened in currency markets in order to dampen interest in its currency and maintain the peg against the euro.

Elsewhere, a surprising and dovish switch was revealed in the latest Bank of England minutes.

The two hawkish members of the bank dropped their call for a rate hike and the vote was now 9-0 to maintain the status quo, Mr Tuffley said.

The Reserve Bank of New Zealand was expected to keep its official cash rate (OCR) unchanged at 3.5% when it meets tomorrow, the same day as the Federal Reserve.

New Zealand Institute of Economic Research principal economist Kirdan Lees said although inflation had fallen below 1%, it was not the time to slash interest rates.

The NZIER monetary policy shadow board recommended keeping the rate the same.

Domestic indicators, such as the NZIER's Quarterly Survey of Business Opinion, pointed to strong economic growth of 3% to 3.5% continuing from the end of last year to the start of 2015.

Also, Auckland city's median house price rocketed up 13.2% last year, boosted by strong migration.

Those factors favoured high interest rates, he said.

''But the price of oil has slumped, taking annual inflation from 1% in September to 0.8% in December.

"Inflation pressures are also extremely muted right throughout the economy. It's simply hard to find businesses that can pass on price increases to consumers.''

Dairy price falls and drought conditions would also dampen economic activity in 2015.

Those conditions leant towards lower interest rates, as some shadow board members preferred.

Weighting up competing pressures, most of the shadow board were comfortable leaving interest rates on hold, Dr Lees said.

 


At a glance

• Oil prices fall to new lows.

• The past few weeks have been action-packed with central bank news and developments.

• The Swiss National Bank stopped intervening, the ECB announced quantitative easing and the central banks of Denmark and Canada cut rates.

• Tomorrow, the Reserve Bank of New Zealand and the Federal Reserve make policy decisions. No changes expected - interest lies in the respective outlooks.


 

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