Market Outlook – UK Economy Clouded by Inflation
Will it help the UK’s economy now that crude oil prices are declining?
The global reliance on fossil fuels has advantages and disadvantages. Crude oil, natural gas and coal have driven economic and industrial development but pump out so many greenhouse gases that the environment is damaged because of climate change and pollution. Also on the downside are constant geopolitical disruptions which affect the supply side, including the present conflict in Ukraine and subsequent upheaval in natural gas and crude oil supplies to Europe from Russia.
Crude oil traders have priced in their expectations of a deeper recession in the US and potentially in the UK, pressuring spot prices into a downturn. Inflation in the crude oil markets was triggered in the second quarter after fighting broke out between Russia and Ukraine and in reaction to a rapid recovery in the global economy after the worst of the COVID-19 pandemic.
The outlook for the crude oil markets has changed for reasons other than recession fears as demand shifts from Russia to the US. The Energy Information Agency (EIA) projects a massive increase in demand for US crude oil in 2023 and the country’s current inventories are on the rise.
Most of the new demand for US oil comes from Europe as the continent scrambles to replace its normal supplies from Russia. Inflation in crude oil and natural gas markets triggered a cost-of-living crisis in the Eurozone and set the European Central Bank (ECB) on a hawkish course.
The ECB just hiked its key interest rate by 0.75 percent, taking the benchmark to 1.25 percent. Will this be enough to tamp down inflation in the short term? Time will tell, but if we compare the ECB’s policy to the Federal Reserve’s, it took more than two rate hikes for inflation to start falling. On the other hand, the EUR saw support after the ECB’s rate decision, rising above parity to the USD. Whether the Eurozone’s single currency can maintain its head above water depends on the bloc’s economic growth and future interest rate hikes.
Declining crude oil prices will likely help to subdue inflation in the UK, US and Europe, but there is still plenty of scope for uncertainty in the oil markets given the geopolitical risks. In addition, OPEC has cut production levels as global recession risks rise which may feed into crude oil price dynamics in the short term.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
