This week the UK, Sweden and Spain revealed price indices at multi-year lows, with the latter two economies bumping along in negative territory. Meanwhile, China's factory-gate prices dipped again in September, and German investor confidence fell back for the 10th straight month. Throw a possible pandemic into this deflationary mix and it's hardly surprising that yields on 30-year US Treasuries have been forced below the key 3 per cent marker for the first time this year. The end is nigh - apparently.
As ever, the price of crude oil is held up as the barometer of global economic activity - and the portents aren't favourable. There has been widespread wailing and gnashing of teeth as the cost of a barrel of Brent crude slumped to a four-year low of $84 earlier this week - that represents a pullback of 22 per cent since midway through this year. While a fall of this magnitude was always likely to generate column inches, particularly as some eurozone economies edge towards a deflationary spiral, it pays to put commodity-linked anxieties into context.
For a start, although it has been trending downwards since mid-June, the price of Brent crude is still averaging around $107 a barrel since last October. That's only $2 adrift of the adjusted five-year average, so unless the $80-$90 range becomes the "new normal" as some commentators are suggesting, or if the current level is maintained well into next year, then the effects on oil company earnings aren't likely to be too drastic. And conceivably, if you're holding shares in one of the big integrated oil and gas plays, then you could even reap some near-term benefits from improvements in their refining margins.
The fall-away in prices is being linked to a steady decline in Asian demand, combined with a growing supply surplus brought about by increased output from Russia and the US. The success of the shale boom in the US has been well documented, but Russian oil output inched towards a post-Soviet high last month despite western sanctions. Combine this with news of a demand slide, according to the Paris-based International Energy Agency (IEA) global demand for oil will slacken appreciably this year and next, with next year's demand forecast to expand by 1.1m barrels a day, 300,000 fewer than the previous estimate.
So that's it then - pure market dynamics taking hold. But we all know that oil markets don't always work that way. Last December ('A crude assessment' IC 20 Dec 2013), we pointed out that Opec's decision to reaffirm its production levels at 30m barrels per day (bopd) seemed at odds with the expectations of some member states that demand for Opec crude would slip back to 29.6m bopd this year. Why did the cartel, or more specifically Saudi Arabia, choose not to rein in production in order to sustain prices above its explicit long-term target of $100 a barrel? Well, one possible reason is that the Wahhabi Desert Kingdom is trying to shake out some higher-cost marginal producers in the market - some North American shale plays readily spring to mind. It's thought that Saudi Arabia could still fund its internal fiscal commitments at current oil prices. Presumably, therefore, Riyadh might be prepared to live with lower prices for a few months if it serves to choke off new supply to global markets (it's not as though the Saudis couldn't attract external funding to cover any budget shortfall). This conjecture gathers weight when you consider that Saudi Arabia has also been selling crude at a discount to buyers in Asia and the US simply in a bid to maintain market share.
The Saudi strategy - assuming that's what it is - has even attracted internal dissent in the form of Prince Waleed bin Talal - a nephew of Saudi King Abdullah. Oddly enough, however, there has been little comment on the issue emanating from 1600 Pennsylvania Avenue. Could it be that both Saudi Arabia and the US are happy enough to maintain the status quo as both Putin's Russia and a Shia Iran need oil prices above $100 a barrel to balance their budgets? That's probably a little cynical, but it's a dirty business, after all.
