Oil (WTI) has broken below $80 this morning on the back of surging global production, weakening demand and the strengthening US dollar. Canada’s Federal budget forecasts are based on oil north of $95 a barrel…at current levels and lower, deficits will mount in Canada and other energy exporters.
“Goldman Sachs has slashed its 2015 oil price forecasts, making it the most bearish among major financial institutions, following a near 25 percent fall in crude prices over the past five months.
The U.S. investment bank said rising output will outstrip demand—with its forecast weighing further on benchmark Brent crude prices—as forecasters generally pare back estimates for oil due to global growth, a strengthening dollar and ample supplies.
Goldman analysts said in a report released late on Sunday that it expects U.S. benchmark West Texas Intermediate crude to fall to $75 a barrel and Brent to $85 a barrel in the first quarter of 2015, both down $15 a barrel from its previous forecast.” See: Goldman slashes 2015 oil price forecast
Here is a direct video link.
Secular support for oil lies in the $40 a barrel range as shown in my partner Cory’s chart below. Of course no politicians or mainstream economists have even considered what such a decline would mean for global cash flows and budgets.
Each $10 drop in oil prices transfers approximately .5% of global GDP from energy exporters to energy importers. An upside is that energy importers tend to be less wealthy countries and so more dollars in importing nations tends to have a greater multiplier effect in terms of consumer spending. On the other hand, where those consumers are heavily indebted (like today in most countries) the energy savings are more likely to go to debt repayment than increased consumption. This will be good for longer term household balance sheet repair which is desperately needed, but detracts from global growth in the near and medium term.