Greek result……
It was a result we hinted at in last week’s blog and it happened……..a narrow win for Greece’s pro-bailout party, New Democracy. Initially, and as expected, the result pushed markets higher on hopes that the embattled country has bought more time to remain in the euro. Equities across Europe ticked higher and the euro strengthened, at point touching a one-month high of $1.2748. Riskier commodities, such as crude oil and copper, also rose.
Forlorn hopes…….
But these hopes are forlorn, and the early rally faltered as uncertainty resurfaced over the situation in Spain and other eurozone countries, including Italy. Equally, the reality of the Greek situation crept through into the consciousness of markets once more. Although the Greek poll result eased imminent fears of a Greek exit from the euro, concerns over Spain’s sovereign debt problems prompted a rise in the country’s 10-year bond yields, which spiked over 7pc. Italy’s 10-year yield breached 6pc.
Time may have been bought but there is no doubt that further twists and turns remain, and still with the potential for tumultuous outcomes.
On a positive note……..
Markets, like men, are not much good at multi-tasking. So while we have, understandably, all been obsessing over every twist and turn in the eurozone saga, something extraordinary has happened to one of the the most important numbers in the world ……no, not the answer to the Ultimate Question of Life, the Universe, and Everything , which of course is 42. But one might argue, an equally important number……. the oil price.
Oil price falling…….
In a little over three months, the price of a barrel of Brent crude oil has fallen from a high of $128 to just $90. In a time short of good news, this is a rather helpful development to say the least. There are two short-term reasons for this collapse in the oil price.
Short term reasons…….
The first is the deteriorating health of the global economy. Particulary significant is the fact that slowing growth in the US, China and Europe means each leg of the economic stool is now perilously wobbly.
The second near-term reason for the rapid fall in the oil price – its first move down to this level in 18 months – is the recent rebuilding of global stockpiles, largely as a result of Saudi Arabia pumping crude at a 30-year peak, in line with Riyadh’s stated desire earlier in the year to drive the cost of oil below $100 a barrel.
Long term reasons…….
Perhaps, more interesting is the longer-term case that is now being made for a permanently lower cost of crude.
The first of these longer-term reasons is that the supply shortages that drove the oil price higher from about 10 years ago have finally been reversed as a natural consequence of an escalation in exploration spending.
There has been a surge of discoveries that is now being converted into new production, in particular in North America where the US has gone in just four years from being the world’s largest importer of gas to being entirely self-sufficient.
The second longer-term reason for the oil price to move permanently lower is the more interesting, because it represents a game-changer for the global economy. It is the potential for the US to become energy independent as a result of technological advances in the exploitation of shale oil and gas, vast reserves of hydrocarbons that are trapped in sedimentary rock where, until very recently, they defied economically viable extraction.
Positive effects…….
There are three main effects from this. First a falling oil price offers a stimulus to the world economy as the positive effect on the oil importing nations exceeds the negative effect on the oil exporting nations. Secondly we see a reduction in commodity driven inflation. And thirdly we see a reduced transfer of income and wealth from the oil importing nations to the oil exporting ones.
There are specifics which also come to mind, not least here in the UK where we have suffered from consumer inflation which has been persistently over target even in an economic downturn. A lower oil price will help dampen this. We saw the beginnings of this impact last week as CPI fell to 2.8%.
The weaker Euro area nations may be particularly helped as reduced expenditure on oil and fuel is most welcome in countries where the budgets are most strained…….a honeymoon gift of sorts for the new Greek government
Foundation of recovery…….?
Markets won’t rally until the eurozone drama is closer to a conclusion, but lift your eyes from it and you’ll see that there are foundations of a recovery are being put in place.
25th June 2012