Oil Focus on the wealth transfer

As oil prices continue to slump, some commentators are focusing on the winners as well as the losers.

Oil Focus on the wealth transfer

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“The market is fundamentally oversupplied at the moment,“ said Nic Brown head of commodities research at Natixis, “OPEC is looking to squeeze  higher cost producers out of the market and it is an exceedingly painful environment.

“At some point it will have to change because the market cannot handle such low prices indefinitely, but the question now is, who will break first? Will it be the high cost producers in North America, those in other parts of the world, or, perhaps some of the OPEC members themselves?”

Until that point, however, there is another side to this coin. While oil producers are suffering, those that primarily import oil are benefiting substantially.

As Dominic Rossi , global CIO of equities at Fidelity Worldwide Investment points out: “Investors should try to look through this current volatility and recognise what we are witnessing is what we saw in the 1980s and 1990s.  A collapse in oil and commodities generally effects a re-distribution of wealth from commodity producing to commodity consuming countries.”

Brown agrees, adding: “There is a huge transference of wealth taking place. You have seen the most immediate effects on disposable income in places like the US, something that is already evident in the most recent US car sales numbers.

“There will be casualties of course, in terms of oil producers, but it has been a huge fiscal boost to countries like the US and India and many of those in Europe.”

According to Rossi, as a result of this, “the equity markets will soon refocus their attention on the benefits of falling oil prices”.

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