Oil: All about the base effects - Nomura

Research Team at Nomura, calculates energy price impacts on G10 inflation.

Key Quotes

“Market inflation expectations have soared following the US elections, with Donald Trump promising to reflate the US economy, pushing nominal yields sharply higher.”

“Energy price base effects are still expected to push headline inflation higher in the coming months, with the negative impact of the 2014-16 energy price collapse (which significantly brought down year-on-year inflation rates) starting to fade, raising the headline inflation rate. This can have positive impacts on consumer inflation expectations, which can feed through into higher inflation.”

“We calculate base effects across the G10 (using the same methodology as before) under three oil-price scenarios: 

1) The status quo: Oil prices hover around current levels, with WTI Crude at a constant level of $47.50 p/barrel.

2) Bearish oil scenario: The oil price falls to $40 over the next six months and remains there in the future. This could follow US shale oil re-flooding the oil market, and OPEC supply perhaps increasing in response. 

3) Oil bullish scenario: Gradual rise to $60 per barrel by end-2017. OPEC cuts supply, and Trump infrastructure spending drives global commodity demand.” 

“Base effects peak in North America and Europe in February 2017. They are largest in the US and Canada, but the euro area is not far behind. However, if oil prices remain constant, by November 2017 most of the base effect gains are removed, with the notable exception of Japan, Australia, New Zealand and to some extent the euro area.”