Oil prices — Geopolitics or growth?
It’s the economy, stupid. Or isn’t it?
Brent crude has risen 15 percent since the end of last year, focusing people’s minds on the potential this has to choke off the recovery in world growth. But some reckon it is the recovery that’s at least partly responsible for the surging oil prices — economic data from United States and Germany has been strong of late. There are hopes that France and the United Kingdom may escape recession after all. And growth in the developing world has been robust.
Geopolitics of course is playing a role as an increasing number of countries boycott Iranian oil and fret over a possible military strike by Israel on Iran’s nuclear installations. But Deutsche Bank analysts point out that world equity markets, an efficient real-time gauge of growth sentiment, have risen along with oil prices.
Their graphic (below) shows a remarkably close relationship between oil prices and the S&P 500. Click to enlarge
We find it hard to believe that a genuine concern about a real risk of war would have accompanied a 4.7 percent gain in the S&P 500 index during February to a post-Lehman high.
It adds that an analysis of the oil/S&P500 relationship reveals:
The oil price on March 1 was precisely what it should have been, based on the view of the world economy embedded in S&P 500 prices
Deutche’s conclusion? This year’s oil price rise is essentially benign because it derives from fundamental rather than geopolitical factors.
Of course, there are plenty who disagree.
UBS analysts say the oil price spike is bad news for the developing world — which provides almost all the global growth these days — as the resulting inflation will prevent central banks from cutting rates. They note that copper, the other commonly-used gauge of growth sentiment, has failed to keep pace with oil this year, while economic data and company earnings are likely to be less stellar going forward. They write:
Copper is struggling to rally as oil is pushing higher. This may suggest we are in the early stages of demand being squeezed out by high oil prices. …Growth indicators have flattened out, risk hasnt.
Copper prices did in fact start rising last month and are already up 13 percent in 2012. But data last week showed copper inventories in China stood at the highest since August 2009. That suggests either sluggish consumption by Chinese factories or careful planning by Chinese authorities.