While most investors are looking at inflation reports and advice on Fed interest rates, a neglected recession warning panel is blocked: crude oil.
Why oil prices decrease
Earlier this week, the oil markets were shaken when OPEC + has announced that it would accelerate its planned production increases. The group, led by Saudi Arabia, agreed to increase the production of 411,000 barrels per day in June, just a month after a similar increase for May.
This increase in supply comes as demand shows signs of softening due to high prices and global economic uncertainty. The result? The American crude fell at $ 57.13 per barrel on May 5, its lowest since February 2021.
At first glance, the drop in oil prices may seem a victory for consumers: cheaper gas, lower transport costs and reduced inflation. But history and economy tell a more disturbing story.
A sharp drop in oil prices is often symptoms of deeper economic problems. When demand drops between sectors, it generally reflects wider economic weakness. Indeed, oil consumption closely follows economic activity: more factories, more trips, more expenses all lead to the use of oil and vice versa when activity slows down.
What he says about the economy
One of the main reasons why oil prices count so much is their role of proxy for global demand. If the demand for oil decreases, it probably means that companies and consumers will retreat. Rystad Energy, for example, warned that A prolonged trade war could make half the growth in Chinese oil demand this year. Combine this with the overvoltage of OPEC +supply, and warning signs become more difficult to ignore.
There are also real economic consequences. The drop in oil prices makes drilling not profitable for many American producers. According to the Dallas Fed, current price levels are lower than the balance point for most shale producers.
Diamondback Energy even said that US onshore production may have culminated and may start to decrease this quarter. This is bad news for jobs and capital expenses in the sector, especially since the United States is the largest oil producer in the world.
This reflects what happened during the 2008 financial crisis. Oil increased from $ 145 in July 2008 to around $ 60 at the start of 2009 while global demand collapsed. A high price recovery only followed once the central banks have intervened and the savings have started to stabilize. The parallel? We note a similar drop pressure on oil prices today, as are economic growth forecasts are revised lower.
Add the disinflationist threat to that. The reduction in energy costs leads to inflation of securities, but they can also cause delayed expenses for consumers and businesses anticipating new price reductions. This feedback loop can further stall growth.
Investors must keep in mind that oil is not only another goods. It is the heart rate of the world economy. And right now, this heart rate slows down.
Thus, while others are waiting for the Fed's next announcement, keep an eye on crude. It could be the recession signal that you had not thought of looking at.
Non-liability clause: The content of this site should not be considered as investment advice. The investment is speculative. When you invest, your capital is in danger.
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