By Josie Cox
The weak price of oil is increasingly spilling over into other
financial markets, battering stocks and currencies of oil-dependant
economies and driving central banks to action.
The central banks of Russia and Norway each responded to
continuing low oil prices Thursday to try to stem the selloff in
their currencies. In the Persian Gulf, stock markets saw sharp
declines.
The price of Brent crude, which has tumbled 41% so far this
year, dropped to a fresh five-year low of below $63.90 a barrel,
while West Texas Intermediate hit $60.09--a level not since mid
2009.
"Prices are forecast to remain pressured for at least two more
quarters, " said Barclays oil market economist Miswin Mahesh. He
predicts that crude could slip below $60 a barrel in the near
term--a level which he says is simply not sustainable for markets
in the long run.
Russia's central bank on Thursday hiked its key interest rate to
10.5% from 9.5%, and its deposit rate to 9.5% from 8.5%, in an
attempt to halt a slide in the ruble.
The currency was battered earlier this year by geopolitical
tensions and resulting sanctions, but its decline has been
exacerbated in recent months by the oil shock, especially after the
12-member Organization of the Petroleum Exporting Countries last
month rejected calls for drastic action to cut their output. Around
50% of Russia's annual budget revenue stems from oil and gas
exports.
Elsewhere in Europe, the Norwegian krone fell to a five-year low
against the euro after the central bank cut its key interest rate
to 1.25% from 1.5% to combat slowing domestic growth, specifically
citing the tanking price of oil.
The krone lost almost 1.5% against the single currency after the
announcement, to trade just over nine kroner per euro.
It has depreciated around 7.4% against the euro since the start
of the year. Norges Bank had broadly been expected to keep rates on
hold; it last cut rates in March 2012.
Norway is Europe's biggest crude exporter, and Norges Bank said
in a statement Thursday that "activity in the petroleum industry is
set to be weaker than projected earlier."
"The continuing collapse in oil prices now hangs like a bad
smell over markets," said Anthony Peters, a strategist at
London-based financial adviser SwissInvest, adding that it "creates
all kinds of conundrums in the foreign-exchange market" too.
Tim Ash, head of emerging market research for Standard Bank said
that Russia was now "a rabbit caught in the headlights."
The central bank doesn't want to "waste" reserves by propping up
the ruble, "and doesn't really want to raise policy rates for fear
of pushing the economy deeper into recession."
So as long as oil stays low and sanctions remain, the ruble will
continue to feel the strain, he said.
Société Générale strategists said that they now suggest
investors buying the Turkish lira against the ruble. Turkey is a
big energy importer, to the tune of some $55 billion a year, or
6.5% of gross domestic product, according to Standard Bank. Falling
oil should deliver benefits for both the country's current account
and for inflation. The lira has risen around 4.7% against the euro
so far in 2014.
Further afield, stock markets in the Persian Gulf also plunged
Thursday, with traders similarly pointing to oil. Dubai's market
was down more than 7%. The main index in Abu Dhabi dropped 4.7%,
Qatar slid 4.3% and Oman was down 4.2%. Saudi Arabia, the largest
index in the region, fell 0.2%.
In Europe, the Stoxx Europe 600 closed broadly flat on the day
but the subindex of oil and gas companies ended down 0.4%, taking
its slide so far this year to nearly 18%.
London's FTSE 100 index, a large proportion of which is exposed
to the oil and gas sector, fell around 0.7% to take losses so for
in December to over 4%.
According to several London-based traders, the recent tumble
also inspired the central bank of Nigeria to intervene yet again
late Wednesday, selling U.S. dollars to prop up the naira.
Nigeria's central bank has taken action a number of times in
recent weeks. Early last week, the naira slumped to 186.9 versus
the U.S. dollar to an all-time low. On Thursday it was just below
180, according to Thomson Reuters data.
Oil and natural gas make up almost all of Nigeria's exports and
80% of government revenue, according to the International Monetary
Fund. Last week Nigeria's finance ministry proposed a lower
benchmark for the budgeted oil price, suggesting spending cuts.
A ministry spokesman said that Africa's biggest crude producer
is now budgeting for an oil price of $65 a barrel, compared with
the previous estimate of $73.
"The country lacks a large fiscal buffer, which would allow it
to maintain spending or run countercyclical policies," said Hedi
Ben-Mlouka, an fund manager at Dubai-based Duet, which looks after
around $5.5 billion of equity. As well as Nigeria, Kazakhstan would
likely be hit particularly hard too, he said.
On Wednesday, a report by Business Monitor International, a
research unit of Fitch Ratings, said that the oil tumble had
materially increased the risk of sovereign default in emerging
markets, singling out Venezuela and Nigeria as particularly
vulnerable.
"A handful of net oil exporters are rushing headlong into the
danger zone," the report states.
Chiara Albanese contributed to this article
Write to Josie Cox at josie.cox@wsj.com
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