As we head into a new year, we leave behind many risk thresholds. In addition to ongoing fluctuations in the economy, developments in oil prices likely herald newer risks
Throughout most of 2015, commodity prices remained low, leading to serious concerns about the rate of global growth. Some other developments that have started out this year, such as the US Federal Reserve’s normalization policies and expansionary policies pursued by the central banks of the EU and Japan– which have translated into lower interest rates – will continue to feed concerns over global growth in 2016 as well. In parallel to all these developments, some very intriguing developments have been going on in the price of oil: The price of oil has gone down dramatically over the past year, in spite of the expectation that oil prices would rise up to 200 dollars, an anticipation that still was held by many as late as only a few years ago. As of December 2015, the price of oil had hit 37 dollars per barrel, its lowest since 2008. This caused somewhat of a stir in global financial markets. Stock markets and currencies of emerging markets have been sliding; risk indicators of countries and companies becoming distorted. As oil exporters start finding the recent game difficult, experts have been raising questions about the financial structure of oil producing nations.
But why is the price of oil plummeting? In simplest terms, the fall in the price is due to an excess of supply against the current level of demand. Leaving aside the reason why the oil price keeps falling, it is likely that these developments have the potential to negatively impact the Turkish economy. And that is counterintuitive, as theoretically the situation suggests that Turkey should be happy about lower prices on oil..
OPEC’s refusal to cut down on production after ea recent meeting has contributed to the continuation of the free fall in the price of oil. In theory, lower oil (and energy) prices are great for Turkey, as the country’s hefty current account deficit is mostly comprised of its energy spending. This is why, as oil prices continue to plunge, the country’s current account deficit will shrink, which in turn will bring down the inflation rate; one would think. Although this is all great in theory, things haven’t played out in the same way in real life. Since the year’s start, oil prices have fallen by about 30 percent. The current account deficit has narrowed, but not significantly. The inflation rate hasn’t declined either, mostly because the lira has slid about 25 percent against the dollar since the start of the year.
But why have investors failed to capitalize on this advantage brought along with lower oil prices? In reality, the picture that came into being after the latest OPEC meeting is more unnerving than it seems. There is a strong discordance between Saudi Arabia and Iran, two powerful OPEC members. Saudi Arabia has been offering regional reductions in its oil price in an attempt to increase its market share. Russia, which is not an OPEC member, has also lately upped its production levels in order to be able to maintain a stable oil income. All these developments indicate that in the period ahead, the race for market share will get even tougher. This period will also be a tougher era for shale oil producers in the US. Weak oil prices have already reflected on the prices of other commodities. Industrial metal, already a buyer’s market mostly due to the slowness in global recovery, has been affected by the contagion in oil prices. In such an environment, it is not surprising for investors to opt for selling in the commodities market.
Garanti Investment Strategist Tufan Cömert noted in a recent report that hedge funds maintain oil shorts worth 360 million barrels. According to the report, the expectation here is very clear: The oversupply in oil will be available in 2016 and the price of oil will fall further. This is when we start talking about Sovereign Wealth Funds (SWF), or their “lack”.
Sovereign wealth funds are funds that are owned by states and include various assets. Resources for these funds most often depend on revenues from exports and imports, or currency reserves of a given country’s central bank. Oil happens to be the main source of the world’s largest five wealth funds. These are Norway’s oil fund of $855 billion, UAE’s $773 billion fund, Saudi Arabia’s $668 billion SWF and Kuwait’s SWF of $592 billion.
SWFs invest in a variety of assets classes including commodities or products, or stocks in other countries.
They can also transfer investments to asset management companies. SWFs have, in fact, recently been pulling out their money from these asset management companies. According to recent data, about $19.5 billion has been redeemed in the third quarter of 2015 alone from asset managers by SWFs. Saudi Arabia alone has retreated 70 billion dollars from asset managers in 2015. Because of the plunge in oil prices, cash strapped governments are now selling assets. This trend will likely continue, as oil prices are expected to fall further. The first short-term negative impact of this situation seems to be on asset management companies. Some have already gone under. However, the long-term affects include consequences that will also stop Turkey from benefiting from lower oil prices.
Most of the investments retreated by SWFs came from emerging market economies. Data indicate that the worst quarter in this sense, since the year 2008, has been Q3 of 2015. Things are no better for Turkey in this regard. According to data from th Turkish Central Bank, a total of 7.5 billion dollars have flown out of stock and bond markets in Turkey. The outflow, coupled with losses in the lira, has prevented Turkey from benefiting from the lower oil price. This situation clearly shows that the continued fall in oil prices might not be a reason to cheer for Turkey.
As long as Turkey is dependent on foreign resources economically, the direction Turkish markets will take will always be decided by the mainstream trends in global markets. And at this point, all developments indicate that oil prices stabilizing as soon as possible would be more important for Turkey then their continued decline…
