The price of Oil has come a long way

So far this year we have had a number of moving events. The start of the year was one to forget, as in the first 6-weeks of the year, the bloodbath in markets witnessed in the final 4 weeks of 2015 spilled over onto the New Year. In mid-February, markets seem to have bottomed and a rally ensued, led in the main by a sharp recovery in the price of global commodities, namely oil.

The price of oil is widely regarded as a sentiment indicator as well as indicative of the health of the global economy. With the price of oil dropping by a whopping 75% from above $106 a barrel in June 2014, to slightly above $26 a barrel in February 2016, markets were concerned that the hopes of a global economic recovery was faltering, led in the main by corrections in emerging markets, commodities and sharp declines in investor sentiment. With Chinese data weakening throughout this decline, investors were not at fault to feel the jitters. There have been a number of casualties along the way in fact, with a number of US energy companies filing for bankruptcy.

Since mid-February, the price of oil rose sharply till June 2016 by a remarkable 96% to above $51 a barrel, still 52% lower from June 2014 but this recovery was just what the market needed. Risky assets rallied, sharply, with emerging markets being the top performing region so far this year. True, markets were aided in part by the heavily beaten down prices in mid-February, which provided glaringly attractive entry points, but also accommodative stances by the ECB and Bank of Japan provided the necessary stimulus markets needed to grind tighter.

In the meantime, markets had their fair share of potential market moving events, with Greece entering the limelight once again, the European Banks stress tests, as well as the infamous Brexit vote, with markets, especially credit, proving their resilience and coming out of the recent string of events relatively unscathed. With the lull of the summer trading activity, volatility could potentially increase as trading levels thin, and following the 6-month long rally, we would not exclude some price taking in the weeks ahead.

However, we will be closely monitoring developments in the price of oil, which registered a decline of over 20% from the first days of June 2016 till the first week of August 2016, with the price falling below $40 a barrel, only to recover by another ca. 8% to date at slightly below $43 a barrel.

Apart from taking note of the immediate implication of a weaker price of oil (on emerging markets, equities, bonds, commodities and those companies operating within the energy sector), we are more concerned on the wider implications of a lower (or higher) price of oil on the wider scheme of things. For example, we are aware that the correction in the price of oil since mid-June 2016 is potentially placing ECB’s Mario Draghi’s hopes and projections for a pick-up in inflation in the coming months at risk. Inflation has been well below the ECB’s target rate of 2% and any weakness in the price of oil could prove to be yet another setback at achieving this goal. In view of the recent correction since June, economists are expecting the ECB to add on to its already ultra-accommodative stance in its 8 September MPC meeting, especially following the recent form of accommodation announced by the Bank of England.