Taper tantrums

The European Central Bank has signalled the end is nigh for its role as the stimulator of last resort. Seven years into ECB president Mario Draghi’s “whatever it takes” (more on that phrase later), and the eurozone economy is nearly deemed ready to stand unaided.

You can see why. GDP growth is strong, employment is up, and the bloc’s manufacturing sector expanded in August at the fastest rate since 2011, and the OECD leading indicators for the region are satisfactory.

Plans for running down the bank’s programme of quantitative easing (QE) will be laid out next month. Draghi knows to tread carefully – a suggestion in 2013 that it would scale back QE from its €60bn/month ($72bn/month) level was greeted with a wave of global market volatility. This became known as a “taper tantrum”, and has informed the ECB’s approach to finally winding down QE. Room for error has been shown to be extremely limited, and the possibility of undoing a lot of the past seven years’ work means that planning must be meticulous and precise.

Central bankers thrive on this. Can the same be said of oil ministers? After all, former Saudi oil minister Ali al-Naimi once said that he wanted Opec to act more like a central bank than the political wrestling ring it used to resemble.

If the ECB’s slow and steady approach is not being studied in Riyadh and Moscow, then the architects of the oil market’s own version of QE are missing a trick. “Whatever it takes” was the phrase uttered by Saudi oil minister Khalid al-Falih back in May, when he was battling to push through an extension to the production cut deal agreed between Opec and some non-Opec countries.

The extension was agreed, and now runs up to March next year. Already, talk is turning to whether this could be extended further still because a reduction in global inventories – the deal’s stated target – is proving to be more difficult than Opec had hoped.

If al-Falih still believes in “whatever it takes”, and assuming Russia does too, then the deal will probably be extended again. The conversation should already be turning, although, to how to get out without causing a “taper tantrum” in the oil market. This is a conundrum that has been exercising Russian oil minister Alexander Novak since July, at least

Swiss bank UBS this week modelled what would happen if a replacement arrangement was unable to be agreed. This would likely lead to a free-for-all — a complete return of the non-Opec production and probably a rise in Opec output also, UBS said. This in turn would push inventories up, and any rebalancing from this would rely on “the existing below-trend start-ups of conventional [projects], unconventional slowdown and demand which would also likely be boosted by the lower oil price”. UBS pins that price at $30/bl, with no recovery until 2020.

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