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Even Before 'Black Friday', Oil Was Worst Performer This Year

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Though the global GDP forecast has been marginally marked down by Deutsche Bank analysts, they still anticipate that cheaper oil prices will aid 2015 to post stronger growth than 2014. David Folkerts-Landau and team at Deutsche Bank, in their research report dated Nov. 25, 2014, point out that despite the persisting low global inflation, the outlook varies by region, driving central bank divergence.

Oil prices: Robust U.S. economy

The analysts revised their global growth estimate slightly to 3.6% in 2015 to reflect weaker momentum outside the U.S. However, it is still up from 3.1% in 2014 and 3% in 2013. The analysts expect U.S. growth to be robust at 3.5% in 2015, up from 2.3% in 2014, aided by consumer spending, business spending, lower fiscal drag, and housing. Painting a strong outlook for consumer spending, the analysts reason that household balance sheets are the best in 10 years, aided by rising house prices and equities, while falling gas prices too would support consumption.

Strong US economy Oil

The analysts highlight that markets have mostly reversed the October sell-off. While equities, credit and rates have posted strong gains YTD, the USD rally has affected FX and commodities.

Total 2014 YTD returns Oil

Turning their focus toward the Fed rate hike, the DB analysts anticipate that the Fed could start hiking rates around June 2015 as wage inflation takes hold, though a delay to September appears increasingly possible. Moreover, the analysts note the path of the Fed funds rate will remain strictly data dependent, though it wants to avoid the mistakes of other central banks of hiking rates and having to reverse course:

Fed rate hike Oil

Global growth would still be stronger

The DB analysts have marginally marked their 2015 forecast at 3.6%, down from 3.9%, to reflect the anticipated weaker growth in China and Europe. The analysts anticipate weaker growth in China as the economy rebalances toward a consumption-led growth model. They have revised their estimate for the Eurozone’s GDP to .8% from 1% as Germany decelerates. However, the analysts have revised up their estimate for Japan’s GDP as they anticipate the consumption delay would remove a significant headwind in 2015.

2015 GDP forecast Oil

The following captures the DB analysts’ view on how the markets have cleared several risk events over the last month, though there remain a few hurdles before year-end:

Key events-past and upcoming Oil
The following summarizes the analysts’ views on various asset classes:

View on asset classes Oil

Focusing their attention to oil prices, the DB analysts expect oil prices to remain in a lower range at around $80-$90/bbl, which will aid growth, though producers would be under pressure. The analysts believe only a cut in production could help stabilize prices:

Impact of lower oil prices

However, the Deutsche Bank analysts also believe their views could be marred by key risks such as return to crisis in Europe, a hard landing in China, the failure of Abenomics and a market sell-off due to Fed repricing:

Key risks Oil


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