When Oil Prices Dip, Unexpected Winners Emerge

Most economic measures last week suggested the U.S. economy continues to improve, pushing U.S. stocks to another record close and suggesting the time has come for the Federal Reserve (Fed) to start normalizing U.S. monetary policy. As I explain in my new weekly commentary, this strength provides a boost to the U.S. dollar, which in turn is helping to drive oil prices down. This could have positive implications for some countries, and negative consequences for others.

A stronger dollar is one reason—along with a slower global economy—that commodity prices in general, and oil in particular, continue to fall. Since oil is traded in U.S. dollars, when the dollar moves higher, oil prices tend to fall. This is exactly what has been happening: Last week, the U.S. oil benchmark West Texas Intermediate (WTI) traded down to its lowest level since 2009. The latest catalyst for the move was news that Saudi Arabia cut its prices for the United States. Comments later in the week suggested OPEC may be willing to let prices fall as low as $70 per barrel before the cartel takes any action to curtail production.

It comes as little surprise that among the beneficiaries of falling oil prices are U.S. consumers and consumer discretionary companies. But we are seeing other areas of the market outside of the United States where it is having an effect as well.

Not surprisingly, for large oil-producing nations—such as Russia and Venezuela—lower oil prices are creating havoc. But for countries that import a significant amount of their oil, including many countries in Asia, lower oil prices are a boon.

One big beneficiary of lower oil prices is India, which imports roughly 85% of its oil. Cheaper oil prices are helping to lower India’s chronically high inflation rate (now down to 6.5%) and, given large government energy subsidies, aiding the country’s fiscal position. Lower oil prices, coupled with further reforms from the new Modi-led government, helped Indian equities hit an all-time high in October.

Along with recent strength in both China and Japan––also big energy importers––this confirms our view that investors should consider the opportunities in Asian equities.

Sources: Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.  

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

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