Emerging Market Meltdown Could Undermine Oil Rally
Ultimately, in a worst-case scenario, that could lead to a financial crisis or crises. Governments can’t meet debt payments, currencies collapse, and economic growth grinds to a halt. Debt becomes even more unpayable.
An emerging market downturn, if it occurs over the next year or so, would likely unfold at the same time as the OPEC/non-OPEC group begins to exit, or phase out, the production limits. That means we could have demand destruction happening at the same time as an increase in oil supply, which is obviously a recipe for lower prices.
Bank of America Merrill Lynch says that Brent could drop below $60 per barrel by next year if this scenario plays out. “Should PMIs start to deteriorate over the coming months and encourage long oil speculators to liquidate their positions, or new short specs, oil prices could swiftly drop to $60/bbl,” the investment bank said in a note.
With all of that said, the investment bank also says that this isn’t the most likely scenario, but more of a tail risk event. That doesn’t mean it is impossible.