January 13, 2016

How Will Asian Markets React to Oil’s Fall Below US$30?

2016 is off to a rough start, global markets are in a tail spin, commodities are falling and oil has dropped below US$30 for the first time in 12 years.

Tama Churchouse sits down with Rico Hizon on the BBC to talk about the impact this will have on Asia markets.

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Rico Hizon: Oil dips under 30 dollars a barrel, energy giants scramble to cut jobs and investment. And we look at the business of giving, where being non-profit doesn’t mean you can ignore your balance sheet.

Hello Asia, hello world, glad you could join us for this mid-week edition of Asia Business Report, I’m Rico Hizon in Singapore. Continuing concerns about China’s slowing economy has seen oil prices dip below 30 dollars per barrel in New York for the first time in 12 years. It marks a seventh day of losses, extending the relentless selloff that has wiped almost 20% off prices so far this year.

Light Sweet Crude at 30 dollars and 49 cents per barrel, Brent Crude at 30 dollars and 74 cents. Well it’s hit profits at a British oil giant BP, which is now cutting 4,000 jobs worldwide, 600 of them will be from it’s North Sea operations.

And Brazil’s oil giant Petrobras is massively scaling back it’s investment plans by 32 billion dollars, it is the company’s third cut in 6 months. So what about the impact in Asia? Let’s speak now to Tama Churchouse, joining us now from our Hong Kong studios. Tama, thank you so much for joining us on Asia Business Rreport. Plunging to levels not seen since 2003, how concerned are you that we’ve seen oil prices this low?

Tama: It is pretty concerning Rico, to be honest, it’s not surprising though. We’ve still got excess supply over demand and that’s still gonna weigh over prices in the short term. I don’t think China is that big of an issue when it comes to oil as I think people are making out. China oil demand is still likely to eke out positive growth this year. It’s still really just a matter of two factors, that is excess supply and the second element is of course the ongoing strength of the dollar. Which is also going to push the oil price down.

Rico: But these depressed prices have stressed the energy sector around the world and also the Chinese oil companies, how does this affect Asia’s consumers and countries still subsidizing oil prices?

Tama: Well, to be honest, it’s fantastic for countries that are subsidizing oil prices, because as we saw in Indonesia lower oil prices give you an excuse to actually start to remove those subsidies, which can obviously help government balance sheets. You know, it’s great for the driving consumer, it’s going to be disinflationary for prices obviously.

For companies, it’s a completely different matter, you know, with BP you mentioned earlier, further job cuts, we’re going to see further Cap Ex cuts, all of these companies are trying to trim costs as much as humanly possible, to try and get through this extraordinarily low oil price period. A lot of these companies, which were marginal at 50 dollars are going to really struggle sub-30 dollars for sure; Morgan Stanley saying it could go another 50% down to 20 dollars. So we’re going to see more blood in this sector for sure.

Rico: Many oil and resource companies are depending on China for their profitability with the China trade data out shortly are you expecting the numbers to show further declines in exports and imports?

Tama: Yeah, we’re going to see declines on both. I suspect we’re going to see a larger decline in imports than exports, it’s not great it’s going to be leading to a bigger trade surplus for China. I don’t think the impact on equity markets is going to be particularly… we’re not going to see much, unless it’s a huge surprise to the negative, or the positive obviously, but I don’t think that investors are really looking at trade data that heavily at this stage, I think oil is actually a much bigger… weighing on their mind more significantly.

Rico: Thank you so much for your insights, joining us from Hong Kong, Tama Churchouse.

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