What next for oil prices after hitting multiyear highs?
Oil is normally the king of the energy market. Where it leads others follow.
But in the past few weeks it has been usurped. Natural gas, which for decades was primarily priced off oil contracts, has become the leader of the energy pack, as the crunch in supplies globally has pumped up prices.
Oil has not been immune. Crude prices are starting to take off due to the spillover effects of the gas crunch, as some sectors look to replace gas with oil where it is economically feasible to do so.
Rystad, an energy consultancy, thinks oil demand could be boosted by as much as 1m barrels a day this winter through gas-to-oil switching for power generation and heating alone.
That is helping to support oil prices, with global marker Brent crude hitting its highest in three years last week at $83 a barrel, and US benchmark West Texas Intermediate reaching a seven-year high of $79.
With the Opec+ group declining to accelerate the return of production, and oil demand rebounding hard of its own accord as economies emerge from the pandemic, that is likely to keep support under crude. Will it regain the crown? Not yet, but higher prices may still be ahead. David Sheppard
Just how ‘transitory’ is the surge in US inflation?
The Federal Reserve has maintained for months that the surging pace of US inflation is “transitory” and will abate as supply chain bottlenecks ease. But some investors are not convinced. They argue that as the economy reopens, demand for goods has increased rapidly, stoking prices.
If rising inflation proves not to be temporary, it could force the central bank to lift interest rates earlier than expected to try and curb higher prices.
Wednesday’s release of the consumer price index figures for September should offer some clues into the forces driving inflation higher. Economists polled by Reuters expect the report to show consumer prices rose at the same rate as August, at around 0.3 per cent from the previous month.
Analysts at Barclays said they expect “core goods inflation to remain elevated compared with historical norms as production struggles to keep pace with demand and inventory rebuilding”.
“The stress to global supply chains will likely take some time to unwind,” they added.
Though used-car prices — a concern in previous months’ inflation prints — have declined, international shipping costs have remained high. Energy prices, which can buoy inflation in all corners of the economy, have also surged since mid-September. Core CPI strips out volatile food and energy prices from its calculations, but it could still be affected in months to come if rising energy prices drive producer costs higher.
Higher energy prices this week have driven expectations for the level of inflation to their highest point since May. The five-year Treasury break-even, a forecast of inflation in five years’ time, was 2.7 per cent, well above the Fed’s 2 per cent average target range. Kate Duguid
Will UK growth rebound from near-stagnation levels?
The UK’s economic growth in August is expected to improve from July’s near-stagnation levels thanks to fewer people needing to self-isolate and more social spending.
August’s UK gross domestic product data, released on Wednesday, “should bring better news”, said Andrew Goodwin, an economist at Oxford Economics, who forecast a monthly increase of 0.6 per cent after hardly any growth registered in July.
“Covid-related disruption will have fallen” thanks to fewer cases and the introduction of less-stringent rules on self-isolating, he said.
Social consumption sectors should see a strong pick-up “in activity in response to the lifting of most of the remaining Covid restrictions in late-July”, added Goodwin.
Yet the pace of growth is still expected to be limited by shortages of goods and workers.
Ellie Henderson, economist at the wealth management group Investec, said that supply chain disruptions and labour shortages resulted in weakness in July’s manufacturing output and she expected “similar themes to have played out in the August report too”.
She forecast the economy to grow 0.5 per cent in August, but warned that this GDP release brought more uncertainty than usual due to methodological changes introduced for the previous quarterly figure.
This week will also bring the release of UK labour market data, which may reveal further signs of labour shortages and rising employment.
“The squeeze in the labour market is likely to have continued in August,” said Henderson, who forecast a UK unemployment rate of 4.4 per cent for the three months to August, down from 4.7 per cent three months earlier.
But the jobs data would not yet show the effect of the withdrawal of the furlough schemes at the end of September. The Bank of England’s current forecast is that the jobless rate will not rise over the next few months, although Henderson expects a modest increase to a little over 5 per cent by early next year. Valentina Romei