The global economy is once again showing some worrying signs of a slowdown, opening up a major downside risk to oil prices.
Global trade volumes are declining for the first time since the end of the 2008-2009 financial crisis, according to Reuters. Between December and February trade volumes contracted by 0.8 percent compared to the same period a year earlier. John Kemp of Reuters says the global economy is “one more shock away from recession,” pointing to a series of worrying indicators, including a contraction in cargoes at Hong Kong’s International Airport (the world’s busiest air cargo hub), falling volumes of shipping containers through the U.S. Port of Long Beach, and declining freight rail shipments in the U.S.
The metrics are jarring and stand in sharp contrast to the new record high reached in the S&P 500 in recent days.
There are other cracks that are beginning to become more visible. For instance, the sales of farm equipment in the U.S. are plunging, as American farmers are facing multiple headwinds from Trump’s trade war, falling crop prices and severe weather. Farm profits fell to $69.4 billion in 2018, about half of the $136.1 billion in 2013, according to Bloomberg. “The retaliatory tariffs that China has levied on almost all U.S. agricultural exports has seriously hurt farmers, further depressed already stressed commodity prices, and has had a chilling effect on equipment manufacturers,” Kip Eideberg,…
Contrary to Mr Kemp’s projections, global oil demand is solid and the fundamentals of the global economy are robust.
Oil prices are underpinned by a strong global oil demand adding 1.45 million barrels a day (mbd) this year over 2018, rock solid Chinese oil imports projected to hit 11 mbd this year, a Chinese economy growing at 6.4% this year beyond the projected 6.3%, a confirmed slowdown in US production and a tightening global oil market caused by OPEC+ production cuts.
A delay in reaching a deal to end the trade war between the United States and China continues to cast some uncertainty over the global economy. However, sooner or later a deal will be reached because President Trump badly needs it. The US economy has been suffering far more adversely than China’s economy as manifested by a 49% decline in US farm sales’ profits from $136.1 bn in 2013 to 69.4 bn in 2018 as a result of the trade war. China’s economy is 28% bigger based on purchasing power parity (PPP) and more integrated in the global trade system that the US economy, hence its ability to withstand the trade war better.
Still, an end to the trade war will remove uncertainty and provide a lift to the global economy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London