23.06 Weekly Viewpoint : Oil prices down significantly since the beginning of the year

However, the movement has only restored prices to the levels observed throughout most of 2016. Furthermore, price declines due to supply side factors are less dangerous for the global economy……


Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy 


The change in absolute terms may be unimpressive (around 11 dollars), but since the end of 2016 oil prices have decreased by 20.4%. The production control measures decided by OPEC last year, and confirmed at the meeting on 25 May, seem to be proving ineffective, whereas US output is increasing and inventory levels are sustained. Could this trend pose a risk to the economic recovery in the emerging countries more dependent on commodity exports? The picture is made more complex by the fact that the deterioration of the market situation comes at a time when interest rates on the dollar are increasing, albeit only on the short end of the curve, and are not accompanied by a significant strengthening of the dollar. However, the drop recorded over the past few months has merely restored the levels observed between April and November 2016, which may represent the normal situation, as opposed to the short-lived phase of prices above the USD 50 mark, which only lasted three months or so. Furthermore, for the time being the decline in prices is due more to excess supply than to lack of demand, which typically makes the net macroeconomic effect more benign. Without doubt, however, the retreat of oil price quotations will again hold back the inflation normalisation process, as well expectations for price growth. Furthermore, it may aid to some extent a re-composition of growth to the advantage of final domestic demand, at least in advanced countries.

According to some, Brexit would ultimately have destroyed the European Union and the euro.

For not, it has only destroyed the conservative government’s parliamentary majority in the UK. The European Union has successfully imposed its negotiation sequence and, in the meantime, is preparing to launch a common defence strategy.

Negotiations on the United Kingdom’s exit from the European Union began in a markedly unfavourable context for the British. The May government has been weakened by the outcome of the snap election, which has forced the Tories to seek a coalition agreement. Therefore, those who a year ago were predicting the risk of a domino effect in Europe, have been proven very wrong: Brexit has caused an upheaval of the British political panorama, not of the continental one. The British government’s approach to negotiations still seems uncertain, possibly because the results it can reasonably hope to achieve risk proving very disappointing for Brexit supporters.

The May government also faces the tangible risk of some negative effects (such as the relocation of European agencies and of segments of financial activity, as well as the rise in inflation determined by the depreciation of the pound) materialising clearly before any of the hypothetical benefits, and well before conclusion of the negotiations. The European Union, despite the difficulties it is encountering in relations with some states of Central-Eastern Europe, has a rather clear negotiation platform; also, the fact that the agreements need to be ratified by all 27 member states and, the greater relative weight of the single market, result in a significant imbalance in the negotiation powers of the two sides.

Another interesting, though indirect, consequence of the UK referendum emerged this week, with the launching by the European Council of a structural cooperation project in the field of military defence, which will be defined in the next three months. Participation will be open to all the member states available, and the mechanism will not require a unanimous vote at the Council level to be initiated. Therefore, some aspects of the agenda laid out by the European Union authorities following the Brexit referendum are starting to take shape. On the other hand, it will still take time to understand whether progress can also be made in strengthening the monetary union.


Appendix
Analyst Certification

The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld.ch