Oil prices will depend more on dollar strength than production cut prospects: Michael Hewson, CMC Markets

In a chat with ET Now, Michael Hewson, CMC Markets, says the link between oil prices and equity prices will eventually break and equity valuations edge up again

ET Now: Crude oil is dictating the world markets right now. The hopes of a coordinated cut in oil production have faded. Where do you think oil is likely to head?

Michael Hewson: The outlook for oil remains a little bit tricky. People are still looking for further declines in oil price and when that happens, the trade will get a little bit crowded. A lot will depend on the strength of the dollar more than any prospect of production cut simply because we have come a long way in a short time. There is a certain amount of bottom-fishing going on with respect to where the base in the oil price currently is. Have we seen it? Could the weaker dollar put a floor under oil prices? There is a possibility that we may have seen the floor in the oil price. In which case, we could just be settling into a lower broader range of between say around about $25 and $45 a barrel.

ET Now: The 10 per cent swing in oil prices last night was extraordinary. Oil prices and equity markets currently are joined at the hip. Do you think this correlation is here to stay?

Michael Hewson: I am struggling to understand it a little bit because lower oil prices are a significant boost to consumption pretty much across the global economy. There is a little bit of concern about over leverage by oil companies, creating a trickledown effect into the broader economy in terms of consumption and job losses in the manufacturing sector. That is also creating the weakness in equity markets because of potential trickledown effect into global economy. Overall, I expect the link between oil prices and equity prices to eventually break and we could see equity valuations edging up again.

ET Now: China’s target for economic growth this year remains in the 6.5-7 per cent range. Does it seem like this is achievable? Do you suspect that the Chinese economy will stall while it works towards making this transition?

Michael Hewson: I guess it depends on whether or not you believe the official numbers. If you look at the PMI data, the retail sales data, the industrial production data, it is clear that the manufacturing sector is finding things difficult and that is not surprising. Globally, manufacturing is finding it difficult. But certainly on the part of the service sector and retail sales, it has appeared to be a slow rebalancing towards consumption. Ultimately I expect that to continue over the course of the next few months. Will China be able to hit its growth target? I think it will be between 6 and 6.5 per cent. So, it can just about hit the target assuming you believe the numbers that China is putting out.