Monday, August 18, 2014

Economy: Hooray, The Oil Price Is falling - Causes & Consequences

(Drivebycuriosity) - The oil price is under pressure. Brent Crude, which represents the price for international traded oil, dropped today below $102 for the first time in more than a year (businessinsider). Brent has now declined more than 3% in August and 11% since a June surge to just under $115. The high oil price has been holding the global economy back, especially Europe suffered, because it depends strongly on imported oil.

It looks like that the oil price bubble is losing air. I have written frequently that the oil market doesn`t represent the economical fundamentals any more (driveby). The oil price is artificially elevated because banks, hedge funds and other speculators pumped a lot of money into the oil market (via financial instruments called futures).  They ignored that the global market is awash with oil thanks to rising production in the USA (fracking) and a sluggish demand (more energy efficiency and weak economy in Europe).

Instead the oil speculation focused on geopolitical risks. Many speculators had set bets that conflicts in Ukraine, Iraq, Syria and other problem regions could lead to a disruption of the oil supply.
The oil market resembles a hot air balloon: A steady flow of geopolitical news (Ukraine, Middle East) has been heating the speculation on upcoming supply problems and has been keeping the price of oil high like a balloon in the air.

In the recent days the news flow from the geopolitical risk areas has been calming, meaning less hot air for the "oil price balloon". As a consequence many speculators are reducing their bets on possible supply disruptions.  "This has taken an enormous amount of speculative steam out of the oil trade", explains one expert (seekingalpha).

If the fall of the oil price continues it would work like a global tax cut. Consumers would have more money to spend for other goods and services. Hence a pullback of the oil price would foster consumer spending and rekindle the sluggish retail sales in the US and Europe. Companies could invest more money because of shrinking energy and transportation costs.

If the oil price drop continues - and it should as long as no new conflict is cooking up which could be used as an excuse for the oil speculation - falling energy prices could deliver some tailwinds for the global economy. Especially the weak European economy could use some boost from a lower energy bill.

No comments:

Post a Comment