Cees Bruggemans: Don’t bet against oil falling to $50; Rand at 12:$

Independent economist Cees Bruggemans is bearish on both the Rand and the oil price – but not surprised at the aggressive moves of the past month. It is now common cause that the oil price is reacting to a war between OPEC and the North American frackers – the fact we have discussed at length on Biznews and which is this week’s cover story in The Economist. Cees, a one-time economist at Royal Dutch Shell, reckons oil had plenty of downside, while a Rand at 12 to the US Dollar is also possible. – AH

Rand and oil made abrupt downside moves in recent days, with the Rand declining beyond 11.50:$ and 14.20:€, Brent oil dropping below $66.

Both looked on skids this week.

Oil was hit hard by Kuwaiti National Oil Company CEO saying oil had downside potential for at least six months, looking for a new bottom. Chinese trade data also didn’t help, imports declining mainly on weaker commodity import prices.

It all helped to turn sentiment decidedly bearish.

The oil rout appears far from exhausted. More price downside remains feasible as an oversupplied global market typically tests aggressively to the downside.

The abruptness of the aggression,  though, is more characteristic of recessions as global demand falls away. This time there is a weak global demand feature, but not anything approaching recession. In contrast, the explosive nature of global oil supply additions in recent months seems to be doing most of the driving, along with geopolitical speculations focused on Russia, expecting yet more pressure to be put on her.

These various forces are extremely negative for oil and appear far from finished.

Any oil price forecasts now represent a race for the bottom, trying to stay ahead of the building wave. Instead of trying to guess the trough right, it is perhaps more important to get annual averages right. Brent oil averaging close to $50 in 2015 looks feasible, compared with averaging nearer $110 in first half of 2014. This is a major shock to the global economy which will take months unfolding.

The abrupt hit to the Rand so far this month moved quickly from the general to the specific.

The weekend BIS comments about Emerging Market corporate exposure to rising Dollar debt in a Dollar rising cycle assisted the market in turning more bearish on especially EM Fragiles.

This built on US employment data last Friday showing robust gains, inflaming Fed policy expectations of an earlier mid-2015 start to rate hiking and fanning the Dollar, even as US long bond yields have since dropped, partly under the influence of the aggressive energy price declines eroding even US inflation expectations.

ECB president Draghi disappointed markets last Thursday with no additional concrete evidence of imminent QE (bond buying) policy action caused the Euro to claw back some of its earlier losses in anticipation of a more resolute show of force.

Disappointing overnight Chinese data didn’t help, further keeping the Rand slide alive.

Thus in quick succession, key European, US and Chinese policy statements and data releases were anything but good for our complexion, with the BIS comment further inflaming sentiment.

The Rand more specifically was also hit in recent days by a slew of disappointing domestic data, from the poor quarterly growth data revealed by the release of the SARB quarterly bulletin (though still only up to 3Q2014), the dire Eskom situation coming ever more sharply into focus with its need to impose blackouts and sketching a very constrained growth reality for many industrial users, but also household suppliers, and the very large SA current account deficit at 6% of GDP.

None of this instilled confidence.

It confirmed our shakiness as an EM Fragile, with market sentiment brittle enough to stick it to us.

Despite the falling oil price scenario being SA supportive, it has not saved the Rand’s bacon this week. The other forces, some of them also contributing to a lower global oil price, are perceived as Rand negative, this in addition to the local climate deducting from sentiment.

It suggests more Rand downside towards 12:$, while the Euro leg must be hoping for renewed focus on ECB policy easing in 2015 providing grounds for Euro easing, thereby also assisting in stabilizing Rand prospects.

For now, however, that is futuristic mood music as the market enforces a Rand repositioning reflecting its poor domestic and external fundamentals, with the full oil dividend yet to come into focus.

If that is the SA growth argument, there is another side to it as well, namely that the sliding oil price prospect is creating further SA inflation downside, below 4% within six months, possibly averaging below 5% in 2015, making SARB rate hiking less likely, making SA offered rate premiums less attractive, and this adding to the Rand sell off in the short term.

Some of this stuff has further to go.