Oil prices hit their lowest level in over five years on 13 January 2015 when Europe Brent was traded for US$45,13 (N$518,53) per barrel.

On 16 March 2009 oil was traded at US$44,12 per barrel and on 3 September 2009 oil cost the equivalent of N$518,52 per barrel based on the daily exchange rate.

Compared to a high of US$115,19 pb on 19 June 2014, prices slumped by 61% and are currently some 56% lower than a year ago and 54% in Namibia dollar terms.

However, prices recovered slightly towards the end of January to US$46,07 per barrel, which is still 58% below prices a year ago.

CONSENSUS

There appears to be consensus among most experts that oil prices will remain at these levels during 2015 while some expect such price levels to prevail over the next two to three years.

The oil price developments are caused by supply and demand as well as the politics of the Organisation of the Petroleum Exporting Countries (OPEC).

Global oil demand increased on average by 1,5% annually between 2009 and 2013 from 84,8 million barrel per day (mb/d) to 90 mb/d, but slowed down to 1,1% between 2013 and 2014.

Demand is expected to grow by some 1,3% in 2015 to 92,3 mb/d. Subdued global economic growth is one of the contributing factors to the slow growth in oil demand, along with technological advances, concerns about climate change, and a shift from primary and secondary sector activities to the service industries.

Oil supply has risen faster due to the boom in shale oil production in the USA and Canada. Oil production in the USA rose by 39% between 2009 and 2013, making the country the third largest oil producer behind Russia and Saudi Arabia.

BALANCE OF PAYMENT

The lower prices also strengthen the balance of payment position. Oil imports accounted for 9% of total imports in Namibia in 2013 amounting to some N$7 billion.

Oil imports ranked as the third largest import item after transport equipment and chemicals. Hence lower oil prices will reduce Namibia’s trade deficit and improve foreign exchange reserves. Motorists are benefiting from substantially lower fuel prices that have dropped in February 2015 to some 20% below pump prices a year ago - levels last seen in the middle of 2012. However, low oil prices are not only good news. Depending on how long they will prevail, they can have a negative impact on oil exploration activities in the country in the medium to long term. In addition, demand from Angolans living in Namibia or coming for shopping could decline once the lower oil prices impact on salary levels, economic activities in Angola, and the value of their currency. Furthermore, since gas prices are linked to oil prices, the price decline can have an impact on the development of the Kudu Gas project, the financial viability of which has been questioned by some experts recently.

COMMODITY PRICES

There was much talk about a looming currency war, meaning countries would devalue their currencies in order to strengthen their competitive position. The current fears indicate the lack of coordinated responses by central banks across the world to the current economic challenges.

The Namibia dollar has appreciated against the Euro since 1 January much stronger than against the US dollar and GBP.

Once the European Central Bank actually starts buying bonds, it can be expected that ‘cheap’ money is looking for better returns in emerging markets as well, as it was the case during the Quantitative Easing in the USA. Quantitative easing is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target.

This could put further upward pressure on the recipient countries’ currencies, such as the Namibia dollar. Copper prices like oil prices have been especially hard hit recently, but have been on a downward trend since the second half of 2013 with some fluctuations along the way. The price for copper dropped to its lowest level since 22 July 2009, when it traded at US$5,340 per ton on 29 January 2015. The metal has lost a quarter of its value over the past twelve months, which is not good news for the Namibian copper mines in particular the commencement of production at the new Tschudi copper mine that is expected towards the end of the first half of 2015.

The drop in prices is a reflection of declining demand because of lower economic activities in particular in China. Uranium prices have lost some ground again after reaching an almost two year high on 17 November 2014 at US$44 per pound. Uranium was traded at US$36,75 per pound end of January 2015, representing a gain of 5% over January 2014.