Forex Trading Library

Crude Prices Keep Falling: Should Traders Worry?

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Since early November, crude prices have been falling markedly. Brent is down around 20% in that period, and a couple of days ago even fell below the level at the start of the year. Not only have the gains from the war in Ukraine been erased, but Brent is over $13 cheaper now than it was the day before the invasion.

Of course the main concern over the  last year has been inflation, with the rise in energy prices seen as one of the main drivers. So, if crude prices are coming down, shouldn’t that be a good thing? As far as bringing down inflation, at best, that’s a maybe. But the problem is that crude prices are often a sign that something else is going on. A large drop in crude prices could be a worrying sign that there is trouble in the global economy. And that could mean some shifts in the forex market.

China, and expectations

Yesterday, Chinese authorities announced a series of changes to its covid policy. They were widely seen as shifting the focus towards reducing the economic impact, after large scale protests and reports of slowing economic growth. But the market didn’t react all that positively, since the measures were largely telegraphed and a lot of uncertainty remains.

Up until recently, there was plenty of speculation that crude prices would rise if China announced an end to lockdowns. Chinese authorities went a long way towards doing so, but prices in crude have not improved. One of the key measures announced was a lifting of controls on internal travel, which was seen as a major obstacle to supply chains. But the expected rush of Chinese to buy plane tickets and consider car journeys was not met with a boost in fuel demand.

Where the problem lies

Crude prices in a certain way can be seen as a bellwether for the economy, since practically everything requires energy. Increasing economic performance requires more energy, or radical investments to improve energy efficiency. Europe, the second largest energy market in the world, has managed to reduce its energy consumption by around 20% compared to prior to the war. Meanwhile, industrial production in the shared economy has remained relatively stable, and has even increased in the latter half of this year.

Across the Atlantic, the largest consumer of energy, the United States, has seen industrial production growing faster than in Europe, but the growth rate has been slowing. In the latest DOE report, gasoline stockpiles increased more than anticipated. This was one of the factors leading to lower crude prices, as it showed Americans were driving less. Higher gasoline prices are just one of the factors eating away at Americans’ purchasing power.

What happens now?

Crude prices rocketed higher in the early part of the year over fears that there would be supply shocks, particularly over the winter. That means a lot of supplies have been bought and stocked up, but so far no major supply shocks have happened. Meaning that many firms have all the fuel they need for the coming months, which could keep putting downward pressure on crude.

 

Although crude prices often can point to growing expectations of a global economic slowdown, that might not be the case for the moment. At least until we know how harsh the winter will be.

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