Oil Prices
One of the key drivers of inflation is the cost of energy. Oil prices have caused inflationary pressure with concerns related to the Russia-Ukraine conflict as well as uncertainty in the Middle East.
However, continual problems in China's economy, as well as an overall slowdown in global growth, suggest that oil prices may be soft going forward. If that's the case, oil as an inflationary input may be diminished. Lower energy prices will help continue to drive down inflation rates.
Geopolitical concerns can notoriously affect the price of oil. Prices can change on a dime depending on the news headlines. Still, given what we know now it does appear that energy prices are headed lower and that may result in a lower inflation rate.
Remember that a lower inflation rate means the Federal Reserve may be prompted to stimulate the economy with rate cuts; that is generally bullish for equity and fixed income assets. That's assuming the economy does not slow so much that we dip into a significant recession. That's the balancing act the Fed must contend with; control inflation but don't spur deflation.
See excerpts from an article below.
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“Oil prices extended declines during Asia trading hours, after a report that Libya’s oil production was set to be restored pressured prices overnight.
OPEC+ plans to raise output amid weakness in China’s economy have also been dragging prices lower.
Global benchmark Brent slipped 0.57% to $73.33 a barrel, while U.S. West Texas Intermediate futures fell 0.65% to trade at $69.88 per barrel.
The slide in oil prices is the culmination of several events, said Andy Lipow, President of Lipow Oil Associates.
“First the Chinese monthly PMI showing a fourth consecutive month of contraction issued this weekend was a disappointment,” he said. Over the weekend, China released its official purchasing managers’ index data for August, which fell to a six-month low of 49.1.
In a note published late August, Goldman Sachs forecast a “sharp slowdown” in China’s oil demand — the bulk of which is owed to the shift from oil to natural gas and power via EVs. China is the world’s largest importer of oil and the second-largest consumer.
Lipow also noted that the political solution in Libya is likely to get resolved, restoring production that had been cut by 700,000 barrels per day due to a local blockade. Libya’s oil reserves are the largest in Africa.
On Tuesday, U.S. crude oil futures fell more than 4% to log their lowest close since December, erasing all gains for the year, after a report said that Libya’s rival governments could broker a deal that would help restore oil output following days of disruptions. The eastern government in Benghazi had cut production in a dispute with the U.N.-backed government in Tripoli over the leadership of the central bank.”
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