Brent has lost 10$/bbl in one month and is now trading at year lows, having dropped to 43$/bbl and while some are highlighting the role of speculative positions in this price movement, the market is rebalancing fairly slowly, according to Lysu Paez Cortez, research analyst at Natixis.

Key Quotes

“In May, global oil consumption remained practically stable at 97.67 million bbl/day, while production was increasing to end up exceeding consumption by 200K bbl/day, with monthly production in the US which was only 600K bbl/day off Saudi production. Even if the IMF has recently confirmed the drop in crude oil prices was unfavorable for global growth in 2015 (-0.17pt of GDP over all the supply and demand shocks), its current decline does not prevent global industrial production from prospering at the highest pace in two and a half years (3.2% in March). Emerging Asia is the main engine for the global economy while Latin America is conspicuously slowing it. Not all production figures are available for April yet. While many of them were disappointing when they were released two weeks ago (France, Spain, UK, Mexico, Italy), other have provided a positive surprise since then (Russia, Poland).”

“Our expectations:

The decline in crude oil prices will slow inflation down, particularly in the Eurozone, which the figures will be released this week. In Germany, energy’s contribution to inflation will be zero in June while it was +0.5 pt on average over the last six months. Let’s not forget that the price of base metals is downward oriented due to less Chinese stimulus, and that production prices around the world are now slowing down. This raw materials disinflation will support consumption at the end of Q2, while real wages have not increased for six months and retail sales barely increased in volume. However, this disinflation will only be temporary.

Fundamentals continue to suggest an increase in oil prices (CAPEX, OPEC production, global demand, fiscal break-even) and underlying inflations have exceeded their low point as job offers in the US, which precede underlying prices, suggest. The main issue is trying to figure out at what pace the price of crude will increase. If it reaches $60/bbl at year end, inflation will be close to 1.5% in December in the EZ. If it is only $50/bbl, inflation will be a good half point lower. There’s nothing here to raise doubt in the minds of central bankers.”