Oil falls through another support

Singapore

ANOTHER day, another psychological support level for oil breached - as international crude Brent fell below US$60 a barrel to as low as US$59.02 for the first time in five years.

Analysts continue to warn of more volatility in oil prices, even as they highlighted how plunging oil prices can negatively impact some parts of capital markets.

In a note on Monday, ABN Amro senior energy economist Hans van Cleef said: "We think that the drop in oil prices went too fast and too far. We expect that prices will stabilise and start to rebound within several weeks."

But the downside risks for oil prices remain "very large", he said.

Given declining market liquidity ahead of the holiday season, what can also happen is "unexpected and large swings in oil prices in a single day, without a clear or identifiable reason", he added.

Poor manufacturing data from China on Tuesday added to concerns about weakening demand.

The flash manufacturing purchasing managers' index (PMI) from HSBC/Markit fell to 49.5 for December, signalling the first contraction in seven months. A reading of 50 marks the threshold between expansion and contraction.

The US crude benchmark WTI fell to as low as US$53.80 a barrel in intra-day trading on Tuesday.

The floor could be as low as US$50 a barrel for Brent, and US$40 for WTI, said analysts.

A tumble in emerging market currencies and assets added to jittery nerves too. The Russian central bank hiked its benchmark interest rate to 17 per cent from 10.5 per cent, after the rouble fell to a record low against the dollar. Assets such as Venezuela bonds and Thai stocks also sank.

In Singapore, the benchmark Straits Times Index dropped almost 80 points to close at 3,215.09, down 2.4 per cent.

Crude oil prices have fallen about 45 per cent since June, as a supply glut due to record production in the US coincided with slowing demand. The Organization of the Petroleum Exporting Countries (Opec) decided to maintain production at 30 million barrels a day at its meeting in late November in order to maintain market share.

The continued pressure on the oil price could have repercussions for capital markets. Some US$1.5 trillion have been invested in shale production in the US in the past three to five years, said Saxo Capital Market's Asia macro strategist, Kay Van-Petersen.

With some of these oil producers facing increasing risks of a default, stress in the credit sector should eventually also spill over into equities, he said. "In a situation like that, investors just throw everything out and go back once things are settled in to figure out which players have been prudent and more conservative in their balance sheets as well as operational efficiencies."

On a brighter note, the decline in the oil price could translate into higher growth for the Asia-Pacific - if the boost in disposable income is spent.

Paul Gruenwald, Standard & Poor's Asia-Pacific chief economist, said in a note on Tuesday: "Spending the windfall can raise GDP in key economies while saving it will provide little or no stimulus to growth."

If spent, the Philippines, Hong Kong, China and Thailand stand to benefit the most, with output being raised by at least 0.3 per cent, he said. The effect on India and South Korea will be around 0.2 per cent. For other economies in the region, he thinks the oil price fall will have limited impact.

The Organisation for Economic Co-operation and Development (OECD) has estimated that a US$20 drop in price would add 0.4 percentage point in growth to developed countries after two years.

*Price plunge seen sparking tensions in 2015

*Brent seen falling to US$50 as Opec sticks to output decision

* Cheaper oil seen a boon for US banks

*US may hike oil output, says Goldman Sachs