Newsmax Finance Insider Mohamed El-Erian warns that the plunging price of oil has become “more of a curse than a blessing.”
Oil prices have nearly halved in the last 12 months in a tailspin that has pushed prices below $30 a barrel for the first time since 2003.
Allianz's chief economic adviser gave Business Insider 3 reasons to support his theory:
- As oil companies’ profits evaporate, the firms also cut employees and slash capital expenditures. Meanwhile, consumers have yet to rush out and spend the considerable income windfall from cheaper gas but are saving it.
- “When thinking about general price developments, the main focus in the West has shifted from the historical worry of too much inflation to more recent concerns about too little inflation. The challenge of “low-flation” in the United States is amplified by an outright threat dis-inflation threat in Europe,” El-Erian explains.
- "The disorderly manner in which oil prices have dropped has resulted in a bout of financial instability as markets transition from a low volatility regime due to effective central bank policy repression, to one of higher volatility whose impact is amplified by pockets of market illiquidity," he said. "With that, there is increased risk of bad market technical contaminating real economic activity – accentuated by the possibility of some over-exposed banks."
“Over time, however, the impact of lower oil prices is likely to balance out a lot more. Most advanced economies (and some emerging countries too) will come out significant net beneficiaries,” he said.
“Their consumers and a notable part of their industrial base will have the possibility – if not probability – of translating their windfall gains into higher economic activity. And this could well be significant … that is provided the short-term transition challenges are managed well.”
Meanwhile, the oil market's roller-coaster ride this year is not over yet, technical analysts warned, with new lows likely to come after traders catch their breath.
"I don't think we've found a bottom yet," Fawad Razaqzada, technical analyst for Forex.com and City Index in London, told Reuters
. He does not expect prices to extend their recovery to above $35 a barrel, the level needed to prevent a further slide. U.S. crude closed at $32.19 on Friday, up 9 percent.
"For me, there's been no clear technical or fundamental signal that prices have not bottomed out. This is a mere oversold recovery, therefore I think prices will fall back again."
Walter Zimmermann, vice president and chief technical analyst at brokerage ICAP in Jersey City, also expected prices to fall to new lows although he noted that the charts were not decisively bearish. "It may be a dying cat bounce but it has a little too much vim and vigor to be a dead cat bounce," Zimmermann said. He put key resistance at $34.65 a barrel.
"That doesn't mean it's not a bear market correction."
(Newsmax wire services contributed to this report).
is the chief economic adviser at Allianz SE. To read more of his blogs, CLICK HERE NOW.
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