Oil prices may take 3 years to normalize

by Bloomberg January 24, 2016
http://www.mb.com.ph/oil-prices-may-take-3-years-to-normalize/

Oil prices won’t return to more normal levels for two or three years, and those expecting a speedy rebound from this month’s 12-year lows are being unrealistic, Bank of Montreal Chief Executive Officer William Downe said.

“It’s unrealistic to believe it’s going to snap back,” Downe said in an interview Friday in Davos, Switzerland. “Prices will normalize and then start to move up.”

World leaders and CEOs of some of the biggest companies have gathered this week for the annual meeting of the World Economic Forum in Davos, where issues including the global markets rout, China and plunging oil prices have dominated discussions. Oil prices have fallen by nearly a third in the past 12 months, and on Jan. 20 sunk below $27 a barrel before rallying.

For a road map on how the current oil rout will affect North America’s economy, one needs to look back 30 years, said Downe, 63, who oversees Canada’s fourth-largest lender by assets.


Alberta, Texas

The downturn in 1986 is the only really useful example for trying to chart the impacts from today’s slump, he said. The North American benchmark West Texas Intermediate price sunk to a low of $9.75 a barrel on April 1, 1986, more than two-thirds less than the preceding November. Downe spent the early part of his career at the bank focused on the national-resources sector and lived for 10 years in Houston.

“We saw a contraction in the Alberta economy and Texas economy of about the same magnitude, movement in the unemployment rate of what I think will be about the same magnitude and a level of distress about the decline in price,” he said. “But within two to three years, there was a tremendous rationalization. Prices gradually moved back up. The industry was way more efficient and companies that had reordered their production were more profitable.”

Oil prices will improve when production eases and there’s less push by producers seeking to maximize cash flow by bringing more supply on stream, thus removing a market imbalance, Downe said. Demand for oil will continue, he said.

“Worrying that global demand is going to fall is probably not realistic because global demand has increased by 1.6 million barrels in the last year,” Downe said. “So the rhetoric needs to line up with the facts.”



China ‘Transition’

Oil markets this year will mirror much of what’s been happening the past two to three months, though perhaps with not as much volatility seen in the first three weeks of January, he said.

Separately, Downe discussed the “very significant transition” taking place in China, a country his Toronto-based bank has operated in since the beginning of the 19th century. China should continue its economic transformation despite the volatility, Downe said.

“The push to go from a manufacturing/export to a consumption-driven economy is what the world has been calling out for,” Downe said. “I think China is doing what they should be doing, and they need to stick to the five-year plan, which is a pretty good road map, and not deviate from it, and recognize that the uncertainty is creating volatility.”

The Asian nation is maturing in its view on how to develop a more dynamic economy to create opportunity for urban dwellers, he said.

“I think it’s been a bit of a miracle that they’ve been able to do as well as they have,” Downe said. “So I’m not pessimistic at all. If you don’t take the long view in terms of the transition in national economies, you’ll just go crazy.”