DRILLING DEEPER INTO OIL
Oil prices have always been a primary global economic lever, influencing inflation rates, trade balances, and geopolitical relations. This week we explore a breakdown of oil price peaks, its current trading position, factors that shape its volatility, and the leading players in this vital market.
THIS WEEK’S KEY THEMES:
- Exploring oil price turbulence
- US bond yields remain at three-month highs
- Microsoft’s share price plummets by 5.6% after announcing slower growth projections
- US political uncertainty sustains gold’s appeal as a safe-haven asset
- Dollar on track to end October with a 3% monthly gain
A COMPREHENSIVE LOOK AT OIL PRICES
The ongoing interplay between various factors underscores the complexity of the oil market, where geopolitical events, economic conditions, and long-term energy shifts continually reshape the commodity’s price landscape.
HISTORICAL PEAKS IN OIL PRICES
In the past, oil prices have seen significant highs due to various factors, from political conflicts to changes in supply chains. The highest recorded price for oil was in July 2008, when Brent crude soared to approximately $147/barrel, with notable influences being global demand and market speculation in the lead-up to the 2008 financial crisis. Oil approached similar levels during the 2022 Russia-Ukraine conflict, where sanctions and supply chain shifts pushed Brent to nearly $130/barrel. Although dramatic, these peaks underscore the inherent volatility in oil markets driven by complex global factors.
CURRENT OIL PRICES
As of October 2024, Brent crude trades around $90 to $95/barrel. While lower than recent highs, prices remain elevated due to persistent geopolitical uncertainties, ongoing production cuts from key players, and a shifting demand landscape. Market conditions remain responsive to fluctuating economic data, like global gross domestic product (GDP) performance and inflation trends, which have led to varied price movements over recent months.
WHAT INFLUENCES OIL PRICES?
The factors influencing oil prices are multifaceted and often interconnected. Here are the most significant drivers:
SIGNIFICANT PRICE DECLINES
Following the 2008 peak, oil saw a series of declines, most notably in 2020 when COVID-19 brought demand to historic lows, even resulting in hostile prices for US crude. During the early months of the pandemic, with travel and industry activity nearly halted, oil demand plummeted. Limited storage capacity pushed prices to unprecedented lows. Earlier price collapses, such as those in 2014 to 2016, were driven by the rise of US shale oil, which flooded the market amid weak global demand, demonstrating how a rapid increase in supply without corresponding demand can cause the oil price to fall.
LEADING OIL SUPPLIERS AND CONSUMERS
In the global oil market, a few nations play outsized roles as either suppliers or consumers.
CURRENT TRENDS AFFECTING OIL PRICES
DELVING DEEPER INTO MARKET MOVES
US YIELDS REMAIN ELEVATED
In the US, the 10-year Treasury yield reached 4.3% this week, marking a three-month high as economic data continues to reflect the strength of the American economy. Personal spending and income in September rose, signalling robust consumer confidence, while job cuts declined. Jobless claims, too, unexpectedly dropped. This reinforced market expectations that the US Federal Reserve (Fed) may hold off on substantial rate cuts in the near term as it seeks a balanced economic slowdown. A potential Trump presidency looms over the bond market, with concerns about expansionary fiscal policies raising credit risk for US debt, thereby pressuring long-term bonds.
In the United Kingdom (UK), the 10-year Gilt yield fell by 12 basis points to just below 4.2%, hitting a weekly low. The decline followed the Labour government’s budget, which included £40 billion in tax hikes aimed at stabilising public services and bridging a fiscal gap. Key measures such as an increase in employers’ national insurance and capital gains tax aimed to balance public finances. Updated GDP growth forecasts and moderate inflation projections by the Office for Budget Responsibility contributed to easing concerns. At the same time, a 25-basis point cut by the Bank of England (BoE) is anticipated at its upcoming meeting.
South Africa’s 10-year government bond yield hovered around 9.5%, its highest level since July, as investors digested the latest fiscal data provided by South African Finance Minister, Enoch Godongwana, during his Medium-Term Budget Policy Statement (MTBPS) on Wednesday.
MAJOR TECH EARNINGS WEIGH ON SENTIMENT
US stocks fell on Thursday as disappointing earnings from major technology firms weighed on sentiment. The S&P 500 dropped by 1.4%, while the Nasdaq and the Dow Jones saw declines of 2.2% and 350 points, respectively. Microsoft’s share price fell by 5.6% after it announced slower growth projections despite its earnings beat. Meta also reported lower-than-expected user numbers, leading to a 3.4% decline as it contends with rising costs related to artificial intelligence infrastructure. Apple and Amazon were scheduled to release earnings later and saw pre-emptive declines as traders braced for their reports. US economic data, which largely met expectations – with Personal Consumption Expenditure (PCE) prices and personal spending strengthening – is keeping inflationary concerns in focus and putting pressure on US equity markets.
The UK’s FTSE 100 dropped 0.5% in Europe, hitting its lowest level since August. Investors continued to assess the UK budget’s implications, while corporate reports presented mixed results. Medical technology company, Smith & Nephew, saw a sharp 13% decline following a lowered sales forecast, primarily due to weaker demand in China. Meanwhile, beverage bottling partner of the Coca-Cola company, Coca-Cola HBC, performed well, rising 2% with an upgraded annual outlook. Germany’s DAX was also down, led by losses in companies like online retail platform, Zalando, and energy technology company, Siemens Energy. Aircraft manufacturer, Airbus, was an exception, rising 3.4% after a positive earnings report.
South Africa’s JSE Index fell for the third consecutive session, trading near 86,000, its lowest level for October. Local investors focused on recent producer prices and trade figures while chewing over the MTBPS’s updates on fiscal policies, which did little to wow the market. Multinational brewing company, A.B. InBev, led declines in the JSE, sliding over 3% due to weaker-than-expected sales volumes.
GOLD CONTINUES TO GLITTER
Brent crude oil futures climbed to approximately $72.60/barrel after an unexpected US crude inventory draw. The Energy Information Administration reported a 0.5-million-barrel decrease, contrasting with the anticipated 2.3-million-barrel build. Additionally, gasoline and distillate inventories also fell, adding to the price uptick. Ongoing geopolitical concerns in the Middle East continue to underpin oil prices, especially amid warnings from Israel regarding potential retaliatory actions against Iran. Nonetheless, concerns over weak demand from China and a possible delay in OPEC+’s planned production increase maintain a level of bearish sentiment in the market.
Gold prices softened toward $2,750/ounce, retreating from a recent high of $2,790. Political uncertainty in the US is sustaining gold’s appeal as a safe-haven asset, with the possibility of a Trump presidency sparking fears of expansionary policies and a potential rise in tariffs, while a sense of “fear of missing out” also filtered into the market following substantial gains in the metal’s price over the past year.
A RESILIENT ECONOMY CONTINUES TO SUPPORT THE DOLLAR
The US Dollar Index weakened slightly, trading at 103.9, but is on track to end October with a 3% monthly gain, its highest level in over two years. Recent economic data reinforced expectations that the Fed may slow its pace of rate cuts following robust third-quarter growth. US personal spending data was strong, and jobless claims fell, signalling a resilient US economy. Market participants now look toward the upcoming payrolls report, with a rate cut likely at the Fed’s next meeting and a potential additional cut in December. The dollar, however, faces some uncertainty from a possible Trump re-election, introducing fiscal policy uncertainties.
In Europe, the euro appreciated to $1.087/€ after higher-than-expected inflation data raised prospects of a gradual European Central Bank (ECB) approach to rate cuts. Eurozone GDP growth exceeded forecasts, driven by resilience in countries like Germany and France. These factors led to a 25-basis point rate cut by the ECB in December, contributing to the euro’s modest monthly gains.
The British pound remained below $1.30/British pound despite some recovery as traders digested the Labour government’s budget and adjusted expectations for BoE rate cuts. Projected inflation rises and revised GDP growth figures added some pressure, with the BoE expected to cut rates next week and a potential December decision still in flux.
South Africa’s rand traded near R17.60/$, benefitting from a softer dollar but remaining restrained amid anticipated Fed policy shifts. Locally, slowing inflation, reaching a low of 3.8% in September, opens the possibility of further rate cuts by the South African Reserve Bank.
KEY INDICATORS:
USD/ZAR: 17.62
EUR/ZAR: 19.16
GBP/ZAR: 22.73
Gold: $2,756.56
Brent Crude: $74.26
Sources: US Business News, Financial Times, World Bank, Refinitiv, Bloomberg and Trading Economics.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
Weekly Wrap content provided by Citadel Pty Ltd
