2023-10-10 18:53:04
Oil prices fell slightly on Tuesday. The North Sea crude oil type Brent and the American type West Texas Intermediate (WTI) each fell by half a percent to temporarily 87.74 and 85.95 dollars per barrel (barrel of 159 liters).
Supply fears following the terrible events in Israel and the military escalation in the Middle East drove crude oil prices up by more than four percent on Monday. However, according to market participants, investors should prepare for further fluctuations.
While Israel produces very little crude oil, investors fear that an escalation in the conflict could hit supplies in the Middle East and worsen the expected deficit for the rest of the year.
Special situation of the global economy
The sharp fluctuations in oil prices come at a time when the world’s major central banks were about to reach their interest rate peak. Since July, the oil states, especially Saudi Arabia and Russia, have pushed up the price of oil to more than $90 per barrel by announcing production cuts. This threatened to give new fuel to inflation all over the world.
Last week, the significantly increased interest rates caused the price of oil to fall to less than $84. The hope that the global economy would move from high inflation to a phase of calm with a “soft landing” gave way to concerns that the American Federal Reserve in particular was strangling the economy with a restrictive monetary policy.
Since the terrible events in Israel, the price of oil has risen again – although not back to the level at the beginning of the month. At the moment, investors don’t seem to believe there will be a global oil crisis like the 1970s. “Market participants are worried that the conflict is expanding and could involve Iran,” said Giovanni Staunovo, an oil analyst at UBS.
The strong fluctuations in the price of oil also tend to be reflected in the share prices of the major oil companies. Companies such as Shell, BP, Total and Exxon have shown a continuous rise in share price since July, i.e. since the announcement of the funding cuts, then significant share price losses at the beginning of this month – and a sharp rise in share price recently.
“I wouldn’t build up any new positions in oil stocks at the moment,” says Reinhard Pfingsten, chief investment strategist at the Deutsche Apotheker- und Ärztebank. He points out the strong dependence of these stock market prices on further political developments. Conversely, there may also be market participants who speculate on exactly this.
The volatility on the oil market has increased, and that has consequences, says Frank Schallenberger, oil expert at Landesbank Baden-Württemberg. For all companies that need oil in their purchasing and that do not hedge, the risk of purchasing especially when the price is quite high increases: “For all companies that hedge and that work with options, for example, the hedging can then become more expensive because the increased volatility on the oil market increases the premiums in the options business.”
Impact on inflation
The oil price is currently having a dampening effect on the inflation rate, says Jörg Krämer, chief economist at Commerzbank: “The price of crude oil fell in the first week of October – the Hamas attack on Israel only partially reversed that.” That’s why Fuel and heating oil are currently cheaper than mid-September. The economist calculates that this should reduce German consumer prices by an estimated 0.2 percent in October compared to September: “The overall inflation rate is likely to fall from 4.5 to just under 4 percent.”
The European Central Bank (ECB) is also addressing the question of what impact the recent rise in oil prices will have on further combating inflation. “If the conflict drives up the price of oil significantly over a longer period of time, that would of course be a new upward shock for inflation,” said Dutch ECB Governing Council member Klaas Knot on Monday.
The Austrian council member Robert Holzmann said that if “additional shocks” were to hit the economy, further interest rate increases were not off the table, but that one or two interest rate increases would still be possible.
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His French colleague Francois Villeroy de Galhau had previously emphasized that the ECB’s current interest rates were at a “good level”: Despite the renewed Middle East conflict and possible knock-on effects on the price of oil, the ECB is expected to achieve its medium-term inflation target of two percent by the middle of the decade .
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