Oil prices recover strongly after Corona low – Ukraine war drives prices up further
Inflationary pressure is increasing, which central banks are reacting to by raising interest rates
A possible imminent recession could also affect oil prices
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Oil prices at a high level
The high inflation, which was initially dismissed as temporary by the monetary authorities, has not abated – on the contrary. One of the drivers are the high oil prices. The recent rise in these has been triggered, among other things, by politics and a supply shortage. According to Advisor Perspectives, the US policy of recent years with a focus on “green energy” has restricted the approval of drilling and refineries, reduced capital formation for drilling projects and eliminated incentives for exploration. Added to this was the corona pandemic, which led to the shutdown of the economy and a shortage of supply, while the flood of liquidity triggered a surge in demand. This “pull forward” of consumption has led to increasing inflationary pressure and rising oil prices. Russia’s war of aggression in Ukraine on February 24 and the subsequent severe sanctions imposed by many predominantly Western countries have further fueled this development.
High oil prices, in turn, increase business costs, which are passed on to companies and customers. Oil prices therefore have an impact on practically all aspects of our lives and are noticeable in everyday life, for example when filling up with gas or shopping for groceries. In June, inflationary pressure in the euro zone once again increased more significantly than expected. Consumer prices rose by 0.8 percent compared to the previous month and were 8.6 percent above the level of the same month last year. According to Eurostat, inflation contributions came from all index components with the exception of services, but energy prices rose noticeably at an annual rate of 41.9 percent.
Fighting inflation by raising interest rates
And so the central banks are now resolutely trying to fight the high inflation. The US Federal Reserve has already raised the key interest rate three times this year – most recently by a large rate increase of 0.75 percentage points – and the European Central Bank (ECB) is planning the first interest rate hike since 2011 for July. The interest in the euro zone should initially increase by a quarter of a percentage point. If inflationary pressures do not subside thereafter, another, stronger hike could follow in September. According to ECB President Lagarde, under certain circumstances possible increases in key interest rates could also be higher or follow one another more quickly. The US monetary authorities have also signaled that further interest rate hikes will follow this year, so that they are aiming for an average interest rate level of 3.4 percent at the end of the year.
Recession worries weigh on the mood
However, the high level of inflation and the associated resolute action by the central banks are fueling investors’ concerns that the currency holders may be endangering economic development. It was recently announced that the US economy shrank by an annualized 1.6 percent in the first quarter, which was slightly more than previously expected. The figures for private consumption were revised significantly downwards. There was also little good news from German industry and industry in the eurozone, which lost momentum noticeably in June. The purchasing managers’ index compiled by S&P Global for German industry fell from 54.8 points to 52.0 points, while the PMI in the euro zone fell from 54.6 points to 52.1 points.
Even optimistic statements by the head of the US Federal Reserve Bank at an ECB forum could not really lift the spirits: Jerome Powell did say that the US economy was in good shape and that inflation could be fought, while the situation on the labor market remained solid , but fears of a recession continue to dominate the markets. Star investor Cathie Wood even goes so far as to say that a recession is no longer just a possible future scenario for the USA, but is already a reality.
Will a trend reversal follow for oil prices?
Oil prices are not spared from these developments in the market, because if the reversal of liquidity due to the high price level leads to a slowdown in the economy, oil demand could suffer – and ultimately oil prices as well. Advisor Perspectives points out that oil price spikes have a high correlation with economic recessions, financial events and oil price reversals.
Edward Yardeni, president and chief investment strategist at Yardeni Research, told Barron’s that commodity prices are already “definitely pointing to weaker demand for commodities across the board, which could only be due to slowing global economic growth.” Here’s how he sees signs of a peak in oil prices: In a recent note, he pointed out that US oil production had increased and that high prices were faltering. Helima Croft, head of global commodities strategy at RBC Capital Markets, agreed with Yardeni, saying fears of a global recession had come to the fore, eclipsing inflation concerns. According to Croft, the weakness in commodity prices shows “real concerns about a hard landing and what that would mean for demand”. However, she also points out that the energy supply remains tight: “We still have very, very thin spare capacity.”
Even though oil prices have recently eased somewhat after temporarily exceeding the US$ 120 mark in June, they are still at a high level. Whether the big turnaround is actually coming – or has already begun – remains difficult to predict with the fairly volatile commodity prices, according to Yardeni. Ryan Grabinski, investment strategist at the research company Strategas, despite the currently dominating recession concerns, “does not expect us to return to $60 oil anytime soon.” He believes that if prices “don’t go up from here [] at least stabilize at these higher levels”.
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