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Oil in the twilight zone


6 May 2017, London

             May Bulletin Cover

Oil prices are recovering this year from the 13-year lows seen in early 2016. But the upturn is unlikely to reassure producers because the fundamentals of demand, supply and exchange-rate dynamics point to price weakness continuing for some time. In January, the Organisation of the Petroleum Exporting Countries agreed to adjust production with the aim of stabilising prices. The oil market remains in the twilight zone – but this can be a powerful catalyst for reform among Opec states.

Rabah Arezki and Akito Matsumoto identify the threats to the agreement from non-compliance and rising shale oil output. The agreement may provide a short-term solution for exporters but to achieve sustainable development they need to adjust their growth models, argues Bhavin Patel. Other commodities are faring better than oil. Gautam Sashittal advocates the attractiveness of gold as a safe-haven asset during times of uncertainty.

Cedric Mbeng Mezui examines the links between commodity revenues and fiscal policy in Africa, warning against procyclical tendencies that expose external vulnerabilities. John Anyanwu advocates the need for greater state intervention to help lift Africa out of extreme poverty. The scandal associated with oil giant Petrobras risks delaying reform progress in Brazil, writes David Smith.

On Asia, Amando Tetangco, governor of Bangko Sentral ng Pilipinas, explores the reforms needed for the region to avoid the middle-income trap. One possibility is promoting financial infrastructure, where Asia still lags. As Adam Cotter writes, the latest International Monetary Fund reserve asset data show China punching significantly below its economic weight when it comes to the importance of the renminbi. Ikuko Samikawa argues that the Bank of Japan’s adoption of yield curve control may lead to prices at last shifting to a rising trend.

The Federal Reserve appears to be adopting a more activist stance. Darrell Delamaide reflects on Fed officials’ intentions regarding its balance sheet. As documented in the latest book from OMFIF Press, Trump: The First One Hundred Days, the US president may have changed his mind on monetary policy and the Fed. Yet risks for his presidency remain. The Advisers Network was polled on the probability of impeachment. While 69% do not expect Donald Trump to be impeached, some suggested that he might resign.

Other highlights of the May 2017 edition:

  • OMFIF and the National Bank of Poland look at the role of political uncertainty in boosting safe haven currencies in Denmark, Sweden and Switzerland.
  • John Nugée explores the dilemmas facing central banks in exiting unconventional policies.
  • Paweł Kowalewski and Mikołaj Szadkowski document the declining net financial assets of the European Central Bank.
  • Nick Malkoutzis argues that Europe will never understand the euro area’s problems unless creditors shoulder their share of the blame for the continuing debt crisis.
  • In its latest Focus report OMFIF profiles Portugal, a country in recovery mode that is steadily becoming a hub for European business services.
  • David Marsh and Meghnad Desai admire British Prime Minister Theresa May’s decision to call a general election in June.
  • William Keegan reviews With Respect, Minister, the memoir of Brian Unwin, UK Treasury veteran and former European Investment Bank president.

The Bulletin is available to OMFIF members, and to non-members on a subscription basis. To subscribe please contact membership@omfif.org.