Global growth at risk from US$100 oil next year, says BofA Merrill Lynch

[HONG KONG] If oil prices head above US$100 a barrel, it could shave 0.2 percentage points from global economic growth next year - but this hinges crucially on the dollar, according to Bank of America Merrill Lynch.

Sanctions on Iran, shale bottlenecks, Venezuelan turmoil and increased demand pose an upside risk to prices, the bank said in a note. Higher prices would slow growth in the euro-area, UK and Japan though ramped-up energy production in the US, Australia and Brazil would likely cushion the blow to the world's economy, it said.

The US dollar is the swing factor, according to economists Ethan Harris and Aditya Bhave. A stronger greenback would "polarize outcomes further," with oil importers suffering more and producers benefiting, while a weaker US currency would "play the role of equalizer," they said.

"Higher oil prices seem inevitable, and in our view, US$100 per barrel is easily within reach," they wrote. "We would put an oil shock in the top three of our concerns over the next year along with trade wars and the 'exit-sential' risks in Europe."

Brent crude futures have risen over 25 per cent this year to US$84.35 per barrel Tuesday, with the Bloomberg Dollar Spot index up almost 3 per cent. In late September, Merrill Lynch said it expects Brent to peak at US$95 by the end of next June.

While the shale boom in the US means the country is less at risk from higher oil prices, the euro-area, Japan, China and India stand to lose significantly from a spike, according to the report. The countries that stand to lose from higher prices have historically been much more systemically important to the global economy and financial markets than oil exporters, it said.

"Putting everything together, we think US$100 oil could take two tenths off global growth in 2019," the economists wrote. "This is not a major impact, but it isn't trivial either."

BLOOMBERG