Last week’s disappointing US jobs data for December sent oil prices down $1, not a great deal but a sign that a recession in the world’s largest consumer nation would mean lower oil prices immediately.
This data followed figures earlier in the same week showing that Singapore’s fourth quarter GDP actually fell by over three per cent. Singapore is the Asian hub city, and surely a proxy for China which is not as good at collecting statistical information.
Then you have economic commentators as varied as Jim Rogers – who has incidentally just moved to Singapore – and the bond king Bill Gross of Pimco saying that they believe the US is already in a recession. The problem with recessions – defined as two quarters of negative growth – being that you can not confirm them until they are over.
In truth oil futures only managed to stumble across the $100 a barrel line by dint of a single trader who overstepped the mark. Nonetheless, it is quite an event in global commodity markets for the most traded commodity to hit such a high.
The obvious point to make is that the higher you rise the harder you fall, and that from such a lofty point the downside looks a lot bigger than any potential upside. Hence many traders say they are reluctant to take new positions at these levels.
That could prove a self-fulfilling prophesy, at least in the short term. Traders know only too well that $30 of the oil price is down to market speculation. And given the correlation with gold – also hitting a new high, albeit nominal and not inflation-adjusted like oil – then the yellow metal will likely return to earth with oil.
Indeed if more figures released on Wall Street confirm that a recession is in prospect – and actually job figures like last Friday’s have never before meant anything else – we can expect to see oil prices falling back to earth pretty fast.
However, the fundamentals of the oil market do suggest higher price levels are here to stay and that a crash back to the sub-$10 days of 1999 is very unlikely. Recession might cut back demand for a period but new supply is just not coming on fast enough, and rumors abound in the market of permanent losses of output in major fields.
At the same time, new car owners in Brazil, Russia, India and China are not going to want to keep their vehicles off the road, and any set back to the emerging market growth story will probably be a passing market inflection.
That could well mean that oil prices could double or treble within the next five years, making the current concern about $100 look a storm in a teacup. And any serious geopolitical upset would bring $100 oil back almost overnight.