The fall in the global price of oil has showed no sign of easing, and the EIU is reducing its forecast for the average price of dated Brent blend (the international benchmark) in 2015 to US$54/barrel from US$80/b.
Market fundamentals are largely unchanged from six months ago when prices first began to fall: rapid growth in shale oil production in the US, combined with OPEC's refusal to cut output, is resulting in an oversupplied market which, given the generally subdued nature of demand in the global economy, has yet to find equilibrium. The weakness of the global economy is crucial. Although we expect lower prices to boost aggregate demand, the impact will be more subdued than in the past, partly owing to continued deleveraging in the euro zone.
We now expect prices to average $42/b in the first quarter of 2015 (the cyclical low), before moving higher towards the end of the year, for an annual average of US$54/b in 2015. There are several factors that will support higher oil prices in the second half of this year. First, the Saudi budget for 2015 is predicated on an average price of US$60/b, which means some cuts to production, either alongside its OPEC partners or of a more incremental and unilateral nature, are likely around mid-year. Second, North American production growth will slow sharply as lower prices render some investments in new wells uneconomic. Third, the spread between spot prices and two-year futures has widened in recent weeks, which makes oil more attractive to traders, provided that they can access storage. Finally, OPEC meets in June and is likely to be less tolerant of prices of US$50/b or lower.
Prices are likely to be volatile in next few months, as movements have become increasingly detached from supply-and-demand fundamentals. It will take some time before the overall trajectory in prices becomes clear. Although the current rout reflects an imbalance between supply and demand, rising extraction costs support higher prices over the medium term.
Impact on the forecast
The oil price fall will hit the fiscal and external balances of oil exporters, which will push down economic growth for these countries. For oil importers, the lower price will act as a de-facto tax cut for consumers, who are paying less at the pump for fuel. As a result, we are slightly raising our 2015 real GDP forecasts for several major oil-consuming economies, including the US and China.