But it’s worth noting that oil is not the only commodity under pressure. Veteran strategist at Société Générale, Albert Edwards, notes the industrial metals index run by UBS is down 30 per cent since peaking in March, while copper – long seen as a good guide to global economic growth – is down 20 per cent. Oil and agricultural commodities have been slower to roll over, but Edwards hears echoes of 2008, when commodity prices collapsed in the second half of the year.
“If (when) the oil and agricultural complex joins this bear market, headline CPI inflation could quickly collapse to below zero just as it did in 2008-09, when headline CPI fell from 5 per cent to -2 per cent in just 12 months ,” Edwards says.
He sees signs that US economic growth is slowing rapidly and points out many commentators, who were so quick to dismiss yield curve inversion as a credible recession predictor, are now calling for a recession, albeit a mild one. Edwards is much more pessimistic than that.
“Let’s assume – plausibly – for a moment that the US economy does suffer a hard landing and the S&P collapse resumes apace. It goes without saying then that at some point rising unemployment and chaos in the markets will force the Fed to capitulate, or as they will euphemistically call it, pause their tightening cycle! And then the next step as the economy collapses will be to slash rates back to zero and resume QE. We have been on this trip before, and we know what happens.”
While much of the market is worried about how high bond yields will get as central banks tighten, Edwards says its “entirely plausible” that yields on 10-year US Treasuries could fall from 3.15 per cent at present to below 1 per cent as inflation plunges and the US economy craters.
Clearly, this is an extreme view and some oil analysts believe the recent price drop says little about the longer-term pressures on oil supply.
RBC analyst Michael Tran, who has done a good job of reading the market during this cycle, is among them. “What has changed fundamental wise?” he asked after Wednesday night’s price slump. “Not much, nada, zilch – but macro concerns of a recession are clearly dominating sentiment.”
Tran sees oil holding around $US90 a barrel. He says while the paper oil market is falling, RBC’s tracking of actual sales of actual oil barrels suggests the physical market is very strong. The strong prices worldwide for petrol, jet fuel and other refined oil commodities also speaks to this.
The big question for Tran is when high oil prices start to cause demand destruction. But there are few signs of that yet around the world, despite gasoline prices in the US now just below where they were (in inflation adjusted terms) in 2008, the last time high oil prices led to demand destruction.
The big difference between 2008 and now, Tran says, is that consumer savings rates are double where they were in 2008, meaning the “consumer was never more financially vulnerable to record gasoline prices than in 2008”.
At the risk of a “this time it’s different” moment, another challenge with using oil as a recession indicator is that the oil market today is very different than in 2008. As Goldman Sachs says, interest rates might fix inflation, but they won’ t fix the big factor that could keep stronger oil for longer: underinvestment in supply.