Mitch's Mailbox

September 8th, 2022

Do Sliding Oil Prices Signal a Recession?

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Bryan W. from Columbia, S.C. asks: Hello Mitch, I’ve noticed that oil prices have been locked in a downtrend for some time now. That’s great for gas prices and energy costs in general, but is it also a sign that global demand is falling off a cliff? Which, I would take to mean the economy is headed in the same direction?

Mitch’s Response:

Thanks for sending your question! You are on target when it comes to oil prices – as I write, a barrel of crude is off about -25% from March highs, and as the chart below shows, it’s been in a pretty steady slide.1

Price of a Barrel of Brent Crude

Source: Federal Reserve Bank of St. Louis2

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Gasoline prices have also followed suit, which as you mentioned is a relief not only to consumers but also to inflationary pressures. Gas, food, and housing/rent prices have all been fairly significant contributors to rising prices, so the softening there has been welcomed.

I agree with you to a certain degree that falling commodity demand – tied to reduced global growth expectations – is playing a role here. We know the U.S. and Europe experienced weak growth in the first half, and China’s ongoing Covid-19 restrictions and trouble in the property market have dented growth prospects there as well. Expectations for the full year 2023 GDP growth in China keep scaling down, all of which implies less demand for oil and other commodities needed to fuel growth.

What I would add though is that supply is also playing a key role in shifting oil prices. The initial shock from the war threw Russia into question as a top producer, and sanctions from the U.S. and Europe also threw the supply-demand equation out of balance. But since then, Russian oil has started to flow elsewhere, mainly in Southeast Asia and China, and higher prices have also spurred some additional production in the U.S. and elsewhere. Oil markets are global and market-based, and I think the supply shock from the war has started to balance itself out again.

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Disclosure

1 Yahoo News. August 30, 2022. https://news.yahoo.com/u-gasoline-futures-settle-lowest-185201140.html

2 Fred Economic Data. August 31, 2022. https://fred.stlouisfed.org/series/DCOILBRENTEU#

3 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.

4 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.


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