Oil prices extended their bull run on Monday to reach fresh multi-year peaks. Fears of an energy crunch kept upside potential intact while worries about slowing growth were put on the back burner. Both crude markers gained more than $1/bbl with the US benchmark settling above the psychological $80/bbl for the first time since November 2014.
The feel-good factor was however missing from stock markets. Leading US stock indices edged lower as heightened inflation coupled with ongoing supply constraints put a downer on the global economy. Investors are cautiously bracing for US inflation due out tomorrow. All the while, Asian equity gauges also took a step lower amid fresh turbulence in the Chinese property market. Embattled property giant Evergrande missed its third round of bond payments in as many weeks. What’s more, contagion risk is starting to spread across the sector as rival property firms scramble to delay deadlines. All things considered, China’s property sector edging closer to the doldrums, much to the unease of investors.
Returning to the oil front, reports emerged yesterday that Saudi Arabia agreed to supply additional crude to some Asian refiners in November. This comes hot on the heels of Saudi Aramco cutting the prices of crude it sells to Asia for a second month in November. Clearly, its aggressive price strategy is paying dividends. Meanwhile, there were fresh grumblings from Washington about the lack of supplies from OPEC+. An official from the Biden administration stood by recent calls for the producer alliance to do more to temper rising energy prices. Yet such efforts are likely to continue falling on deaf ears. OPEC+ will push ahead with its cautious approach to supply in the year-end period. Set against this backdrop, oil bears will remain in hibernation mode. There can be no winning shorts in the oil market given the current situation.
The I word
By now, you probably know that everything is getting more expensive. From your average Sunday roasting joint to used cars and furniture. At the same time, the global recovery is losing momentum. The latest red flag was Friday’s big miss on US jobs creation last month. Employers in the world’s largest economy added just 194,000 jobs in September, less than the 366,000 gains posted in August and well below the 500,000 that economists were expecting.
The disappointing result prompted Goldman Sachs to cut its US growth forecast from 5.7% to 5.6% for this year and from 4.4% to 4% for the next. And this trend is expected to be mirrored on a global scale. IMF forecasters are becoming less optimistic over the world economy, so much so that they are set to trim their growth outlook when they release their latest forecasts today. Simply put, global economic expansion has reached its zenith.
Consequently, the global economy is on a collision course with stagflation – high inflation and low growth. This, in turn, is threatening to upend central banks’ transitory inflation narrative. The prospect of persistent inflation is becoming reality around the world on the back of the recent surge in energy prices. Rising inflationary pressures could pose headwinds to growth and as a result oil demand. As such, it presents a key downside risk for the global economy and must be managed to prevent it from becoming permanently embedded.
Policymakers need to send a signal that they’re prepared to do something about it. And right on cue, Norway became the first major Western central bank to raise interest rates following the onset of the coronavirus pandemic last month. New Zealand followed suit last week after raising interest rates for the first time in seven years. All eyes are now on the Bank of England which could raise rates as soon as next month, ahead of its US and eurozone peers.
Central banks are shifting rapidly into rate hike mode as inflationary fears percolate into the overall market. This will have important implications for major currencies, and most notably the dollar. The dollar index recently clocked highs of 94.50, levels not seen since November 2020, as markets maintain Fed policy tightening before the end of the year. Consequently, the bias remains tilted to the upside for the US currency. This would normally spell bad news for those betting on higher oil prices. After all, a strengthening dollar acts as a headwind for assets priced in the currency.
However, on this occasion, oil is expected to remain elevated in the year-end period. The cautious OPEC+ approach to relaxing supply curbs and the tepid recovery in US output will support the supply side of the oil coin. At the same time, gas-to-oil switching and the potential for a colder winter in the northern hemisphere will underpin the demand front. Small wonder, then, that most forecasters agree that oil could go higher before the year is over. Energy prices are only expected to stabilize or moderate through next year. Until then, the stage is set for inflationary pressures to remain at the mercy of higher oil prices.