It seems that the global economy has been in a state of continuous flux this year. The titles are repetitive to the point of being absurd. This uncertainty translated into high volatility that pushed the fear gauge, VIX, to a 150-day high last month. It still remains high (although down from its recent high), with most analysts seeming to fall into one of two camps. The former worries about recession-induced demand destruction, while the latter worries about the loss of supply. While both stories have merit, in the short term it is demand destruction rather than a supply crisis that markets will face.
The main question for financial markets and oil markets today is whether or not the world will face a prolonged and deep recession. In the latest IMF report World Economic Outlook 2022, the current slowdown is described as both widespread and more pronounced than expected. This leaves very little doubt about the economic difficulties to come and suggests that the worst is yet to come. IEA World Energy Outlook was equally pessimistic about the current situation, describing the energy crisis as “a shock of unprecedented magnitude and complexity”. The report does not define it as a transitory shock, but as a fundamental change that will continue to rock global energy markets for years to come. Without going into details, we are witnessing the birth of a new energy order as energy flows shift from countries and regions. Coming back to global growth, inflation should be “sticky”, meaning rising prices associated with a stagnating economy. According to the report, it will culminate to 9.5%, but will fall back to 4.1% in 2024. Many countries around the world are already facing soaring levels of inflation, where figures are at multi-decade highs. The IMF expects economic growth to weaken next year.
In Europe, the UK economy has already started to contract as the BoE raised interest rates to the highest level in 60 years in an attempt to avoid what could be the “longest recession ever”. economy decreased by 0.2% over the past three months. Germany, the powerhouse of Europe, is struggling to absorb the shocks of a double whammy from rising prices and the energy crisis. The country’s economic indicators do not look promising.
Source: Primary vision network, Economic show, Segment 4
A trend that can be observed throughout Europe.
Source: Primary vision network, Economic show, Segment 4
Steve Hanke of Johns Hopkin University recently joined the chorus of famous economists warning of an impending recession as it sees more than 90% chance of a severe recession. Another measure used to bolster the case for a recession is the reduction in the supply of M2 which recently hit a 37-month low.
Another indicator, True money supply (TMS), developed by Murray Rothbard and Joseph Salerno is an effective measure of money supply monitoring. Historically, whenever the gap between M2 and TMS moves into negative territory, a recession ensues. The gap has been negative for 5 to 6 months.
If we focus on supply, recent data from Vortexa shows that there has been an increase in oil exports from the Atlantic Basin. The United States, Algeria, Guyana, Brazil and Libya together exported 7.6 mbd in October against 7.1 mbd in September.
Source: LinkedIn’s David Wech
If this increase in production will in no way offset the upcoming drop in OPEC+ production, it is not insignificant. During this time at OPEC’s monthly oil report came out recently, the band added to the chorus of voices warning of the destruction of demand. The cartel lost 400,000 bpd from its estimates for fourth-quarter oil demand, as it only sees it growing by 2.5 mbd. They cut their oil demand forecast for 2023 by 100,000 bpd to a total of 2.2 mbd. It was interesting to see, but not surprisingly, that oil markets were in excess supply over the past few quarters. In terms of economic risks, the report supports the above discussion as it agrees that downside risks remain in the global economy.
In the short to medium term, global monetary tightening, lower production and the increased risk of countries entering recession will continue to control oil demand. That’s before taking into account China’s ongoing Covid problems. The issue of a supply shortage will be kept at bay in the short term due to these developments. In the longer term, however, many factors could lead to a major supply crisis, factors that we will describe in our next article.
By Osama Rizvi for Oilprice.com
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