It has dominated everything and blinded us to an arguably more potent danger to our wellbeing: the gathering signs of a global downturn and recession in the year ahead.
Two warning flares have signalled turbulence to come. The most immediate in the past week has been the sharp sell-off in the stock market of popular hi-tech stocks that have been the main drivers of Wall Street. Reports that Apple had cut production orders in recent weeks for all three of its new iPhone models and growing regulatory pressure on Facebook brought big falls in the much-favoured Faang stocks (Facebook, Amazon, Apple, Netflix, Google). Apple’s decision to stop giving a product sales breakdown has fuelled fears that a peak has been reached in worldwide demand for the current range of products. This, combined with the fading effect of US President Donald Trump’s tax cuts, has brought doubts to the fore. And while stock market movements do not in themselves create wider downturns, they are a barometer of investor confidence in future earnings and prospects.
The second warning is both more diffuse and nearer to home: the continuing slide in the oil price. Barely a month ago the futures price of a barrel of Brent crude was $86.29. On Friday it tumbled a further 6 per cent to close at $58.80, taking the slide to 31 per cent in just six weeks. It is now at its lowest since December 2017 and further price falls at the petrol pumps are now expected.
It is hardly the most encouraging news for North Sea operators, who had been hoping the oil price was on a long-term upward trajectory following the slump of 2013-14 that brought new investment and development to a near standstill.
This ominous downturn was partly obscured by news that oil has started to flow from BP’s major Clair Ridge development 47 miles west of Shetland, discovered in the 1970s and expected to produce for the next four decades. BP expects production to peak at 120,000 barrels a day. Total recovery is reckoned at 640 million barrels. New platforms and pipelines required investment of more than £4.5 billion.
The start-up has been hailed as a triumph of persistence and a significant moment for the UK’s oil and gas sector. However, recent global developments affecting the oil industry are causing disquiet.
Trade wars, weakening emerging markets and currencies, and cuts to global economic forecasts for 2019 by the World Bank and the International Monetary Fund have caused the oil price to slide. There had been hopes that production cuts by Opec leader Saudi Arabia, non-Opec Russia and others would work to tighten supply and cauterise the loss of Iranian output and continuously falling production in blighted Venezuela.
Confidence has been further hit by the brutal murder of Saudi critic Jamal Khashoggi in a consulate in Turkey and the resulting international outcry. The prospect of economic sanctions against the kingdom comes on top of concerns over an imminent slowdown in global oil demand growth due to the high oil prices and a strong dollar weighing on emerging markets’ oil import bills.
Hedge funds and other money managers have moved to liquidate long positions and switch to short positions in Brent and West Texas Intermediate. A report last month by the American Petroleum Institute of a huge build-up of 9.88 million barrels in US inventories further dampened the market mood.
What a contrast to the assessments of likely global supply cuts which drove the oil price 20 per cent higher in the first half of the year. The market mood has now turned bearish due to the US issuing sanction waivers for eight countries importing Iranian crude, record American production and forecasts of slowing demand.
With the US now producing more oil than both Saudi Arabia and Russia and growing sentiment that global markets are amply supplied, OilPrice.com reported that “traders are selling crude down and down”.
Plummeting prices have finally prompted Saudi Arabia, the world’s largest oil exporter, to cut its shipments by half a million barrels per day in December due to seasonal lower demand. And Petromatrix analyst Olivier Jakob has warned, “the balances for 2019 do show, especially in the first half of the year, that there will be significant global oversupply.” However, both RBC Capital and Goldman Sachs have warned that the market is underestimating the impact of Trump’s sanctions against Iran.
The immediate impact for UK consumers and businesses is benign – lower prices at the pumps for motorists and lower energy costs for manufacturers. Cheaper oil also bears down on the general Consumer Price Index. But to the extent that the falling price of Brent crude reflects worries about a global slowdown and slowing economic growth next year, this could herald a covert threat to our economic well-being.
And the outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists who said the US-China trade war and tightening financial conditions would trigger the next downturn. At the start of 2018, optimism about a robust global economic outlook was almost unanimous among respondents.
But Reuters polls of more than 500 economists taken this month showed a downgrade to the outlook for 18 of 44 economies polled, with 23 unchanged. Only three were marginally upgraded. While risks from trade protectionism have been consistently highlighted by Reuters polls since January last year, the latest indicated that growth in about 70 percent of 44 economies surveyed has already peaked.
Amid the daily dominance of Brexit as an economic threat, we may be losing sight of the bigger one.