Photographer: Bartek Sadowski/Bloomberg

OPEC's Loss Is Poland's Gain as Shale Boom Tames Inflation

North America’s shale industry may be the swing producer in the oil market, but it’s becoming a dominant factor across the Atlantic for eastern Europe’s biggest importer of energy.

OPEC’s loss of its pricing power, combined with cost reductions and advances in extraction technologies, have resulted in an “important and irreversible change” for Poland’s $475 billion economy, according to central bank Governor Adam Glapinski, who says shale production is effectively capping oil at about $50 a barrel. 

The disinflationary force of energy is offsetting the impact of stronger consumer demand in Poland. Retail sales surged an annual 8.4 percent in May after a gain of 8.1 percent a month earlier, according to data released on Tuesday. A new projection for inflation by the central bank’s staff due in early July is expected to show little change from its forecasts in March, whose upward revisions largely resulted from higher fuel costs.

“OPEC and Russia may agree on their joint policy about the amount of oil extracted and they still won’t help the situation since it’s up to the oil and gas supply from the U.S. and Canada,” Polish central banker Jerzy Kropiwnicki said in an interview in Warsaw. “Energy resources will remain the anchor for all other prices. However, unlike the summer of 2016, there are no grounds to expect that they will boost CPI.”

Crude has remained stuck below $50, tumbling into a bear market this week, amid speculation that rising U.S. supplies will offset output curbs by the Organization of Petroleum Exporting Countries and its partners, including Russia. New production from OPEC rivals, led by shale, will be more than enough to meet demand growth next year, the International Energy Agency said last week in its first forecast for 2018. 

Oil has now returned to levels last seen before an agreement reached in late 2016 to cut production to drain a global glut. Futures fell as much as 1.1 percent in New York after front-month prices closed Tuesday more than 20 percent below their February peak.

Click here to watch Glapinski discuss Polish rates after June’s meeting

The outlook for oil means one less worry for the National Bank of Poland as it waits for the right time to end its record-long pause on interest rates. The governor has been reiterating that no increase may be warranted until the end of 2018. Poland’s last three tightening cycles were accompanied by rising global oil prices.

“We now up our forecast for core CPI in Poland in 2018 on stronger than expected domestic demand growth in the first quarter,” Agata Urbanska-Giner, a London-based economist at HSBC Holdings Plc, said in a note. “But with a stronger drag from fuel price disinflation/deflation, we end up with only limited changes to our headline CPI forecasts this year and next.”

Oil is the second-largest energy source in Poland, with most of it shipped from Russia. It also relies on imports for two-thirds of its natural gas needs. To diversify its energy supply away from Russia, Poland received the first shipment of liquefied natural gas from the U.S. in June.

Poland, which needs imports to meet 97 percent of its oil consumption, has long been vulnerable to commodity shocks. But inflation has stabilized this year after a rebound that started in late 2016 led to the world’s biggest six-month acceleration in price growth. 

Energy affects inflation by way of housing and transport costs, which together account for a third of Poland’s consumer-price basket. Annual inflation surprised by slowing for a second time this year to a four-month low of 1.9 percent in May.

Energy prices “will be a factor in depressing inflation,” Kropiwnicki said. “Despite all efforts of OPEC, prices of energy resources won’t return to the level from last year thanks to new technologies in oil and natural gas extraction.”

— With assistance by Konrad Krasuski, and Olga Tanas

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