Oil prices dropped sharply. This is not a good sign

23 Nov 2018 17:35|Marcin Lipka

"Oil prices reached their lowest levels in a year. Unfortunately, the reasons for the drops are not optimistic. Out of fear of an economic slowdown, energy resources are cheaper, which will sooner or later also translate into the economic situation in Poland," writes Marcin Lipka, Conotoxia Senior Analyst.

Value of crude oil has been strongly depreciating for more than a month and a half. At the beginning of October, a barrel of the Brent type of this raw material cost more than 85 USD, and on Friday it fell below 60 USD and reached its lowest values since the beginning of Q4 2017.

Higher oil supply makes the market sing

The drops in oil prices were perceived positively over the past few weeks, as they were a result of an increase in the supply of this raw material. In the USA, there was even an explosion in production. The United States is currently producing 11.7 million barrels of oil a day, after the increase of 2 million over the past year. To compare, Poland imports about 0.5 million barrels per day.

Other signals were also favourable. Countries that acquire oil from Iran were given the opportunity to continue their purchases for the time being, despite the sanctions imposed by the US on Tehran. This reduced the need to replace Iranian crude oil with supplies from other countries quickly.

OPEC and Russia have continued to increase production and exports despite many suggestions from cartel leaders about the need to reduce output. President Donald Trump was able to stick his foot in and is apparently trying to take advantage of the recent reputation problems of Saudi Arabia by putting pressure on Riyadh (the de facto OPEC leader) to keep prices relatively low.

Globally larger oil supply and lower prices are very good news for Poland and the European Union as a whole. It means higher savings of consumers and entrepreneurs when the falls are finally reflected at petrol stations. The operating costs of the whole country are also lower, and the trade balance of the country is improving.

Lower demand is a bad omen

However, the downward trend in oil prices over the past few days does not have to be only a positive sign, because the drops are probably caused by concerns about a stable increase in demand rather than an increase in supply. Lower than expected demand for oil may, in turn, be a signal that economic growth is slower than expected.

The downturn was very well visible in Friday's economic data from the eurozone. The PMI indexes, which indicate the future condition of services and industry, fell to almost 4-year lows. Exports were low in the eurozone and employment had been growing at the slowest rate in 22 months. Moreover, the Federal Statistical Office Destatis confirmed that the German economy contracted by 0.2% in Q3.

The PMI indexes show that Q4 for the eurozone may also be weak and that the GDP growth will amount to 1.3% in 2018. Meanwhile, in September the European Central Bank expected that the common currency area will develop by 2.0% this year.

Although the Polish economy has recently been insensitive to external signals, retail sales and industrial production surprised positively in the past month, and the GDP growth pace may slow down very quickly if the economic situation in the eurozone does not improve. Therefore, the fact that oil prices have fallen significantly will be of poor consolation.


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