Cheap Oil and Natural Gas, End of Quantitative Easing

          Ambrose Evans-Pritchard, writing at The Telegraph, discusses two major financial developments. Of course, the first is the rapid decline in oil and natural gas prices. Bank of America expects that oil will decline to $50 per barrel. Although this will likely mean the end of OPEC (and, I would add, unrest in many OPEC countries as their economies fall into the red), there is more debate on its impact on oil production in Canada and the U.S., with varying estimates as to break even. Bank of America expects the low prices will be temporary, and then as suppliers drop out of the market, climb back up to $80 or $90 per barrel by the middle of next year. Low demand and over-production has also led to a glut of natural gas, which gives Europe more room to maneuver vis-a-vis Russia.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

However, the biggest benefit is to energy consumers: "Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn 'tax cut' in 2015."

          The other development is the end of quantitative easing by the Fed.

 Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expect to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said. 

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another. 

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.