Introduction: Oil hits $95 per barrel amid supply worries
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The oil price is continuing its march towards $100 a barrel for the first time in almost a year, creating new inflationary headaches for central bankers.
Brent crude, the international benchmark, has pushed over $95 per barrel this morning, the highest since November 2022.
Oil is being driven up by concerns of a supply deficit, following recent output cuts by Saudi Arabia and Russia, which have been extended until the end of this year.
Kyle Rodda, senior financial market analyst at capital.com, says:
Despite looking technically overbought, the upside momentum looks strong, with a combination of supply and demand drivers supporting the rally. Of course, the big story here is the expected shortfall in supply flagged by OPEC+ last week.
The cartel says it sees a deficit of 3 million barrels per day in the final quarter of this year, which would be the largest since 2007. The increase in oil price is fuelling higher yields, especially at the long end, although equity markets have proven surprisingly resilient.
Brent crude began 2022 below $80 per barrel, before soaring to around $130/barrel after Russia invaded Ukraine last March – fuelling the surge in inflation last year.
Oil did then fall back, but has been climbing since the end of June, pushing up petrol and diesel prices in the UK, for example.
Higher oil prices risk making inflation more persistent, just at a time when central bankers are inching towards ending their cycle of rising interest rates. The US Federal Reserve may leave borrowing costs on hold tomorrow, though the Bank of England may vote to hike again on Thursday.
$100 per barrel is in sight now. And Bjarne Schieldrop, chief commodity analyst at SEB, predicts that oil demand will weaken should prices continue to rise, over $100/barrel.
Schieldrop says:
“The overall situation is that Saudi Arabia and Russia are in solid control of the oil market. The global market is either balanced or in deficit and both crude and product stocks are still low.
Thus we have a tight market both in terms of supplies and inventories, so there should be limited downside in oil prices. We are highly likely to see Dated Brent moving above USD 100/b. It is now less than USD 5/b away from that level and only noise is needed to bring it above.
The agenda
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10am BST: OECD’s global economic outlook
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10am BST: Eurozone inflation report for August
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2.15pm BST: Business and Trade Secretary Kemi Badenoch appears before the Business & Trade Committee
Key events
Tata execs due to discuss steel job cuts
Alex Lawson
A trio of top bosses from Indian conglomerate Tata are to meet with unions in a plush London hotel to determine the future of thousands of UK steelworkers tomorrow morning.
Last week it emerged that, as part of a £500m UK government support package, as many as 3,000 workers at Tata Steel could lose their jobs across three sites, including the vast Port Talbot steelwork in south Wales.
The Tata execs – finance chief Koushik Chatterjee; Raghav Sud, its chief of financial strategy and governance, and Rajesh Nair, who is a UK director – will meet with representatives from the Unite, GMB and Community unions.
It is understood they will meet in the luxurious surroundings of St James’s Court Hotel – a five star hotel near Buckingham Palace, a world away from the grit of industrial steel production.
Unions are expected to push against any compulsory redundancies being enforced, with many employees already expected to take voluntary redundancy. About 2,000 jobs expected to come from Port Talbot’s 4,000-strong workforce.
The decarbonisation plans for the steelworks are also expected to be discussed.
As part of the deal, Tata is expected to inject about £725m to help the company transition to greener production methods.
Here’s Charles Hepworth, investment director of GAM Investments, on this morning’s eurozone inflation data:
“The final reading for EU CPI in August slowed just a little bit more than the previous initial estimate, which indicated inflation on an annualised basis fell to 5.2% versus the initial reading of 5.3%.
It still remains stubbornly above the European Central Bank’s target rate of 2%, and with an accompanying oil price spike seen over the last few months, this will continue to raise headaches for the ECB’s Governing Council. The direction of travel however in inflation will undoubtedly be the welcome silver lining amid this cloud of inflation uncertainty.
Rates are now at the expected peak level in the Eurozone and we should expect them to remain at this level for some time.”
Full story: Germany will suffer worst from world economic slowdown, says OECD
Richard Partington
Germany is expected to experience the heaviest blow from a slowdown in the world economy driven by higher interest rates and weaker global trade, the Organisation for Economic Co-operation and Development has warned.
In downbeat forecasts for the world economy, the Paris-based organisation said Europe’s largest economy was likely to be the only G20 country apart from Argentina to shrink this year during a wider international slowdown.
After a stronger-than-expected start to 2023, helped by lower energy prices and China’s easing of Covid restrictions, the OECD said activity across leading countries was slowing towards the end of the year before a weaker 2024.
The impact of higher interest rates to tackle sky-high inflation after Russia’s invasion of Ukraine has added to pressure on households and businesses, while Germany’s manufacturing-heavy economy grapples with weaker global trade volumes.
The OECD has also predicted that the UK will see the highest inflation rate of the world’s G7 advanced economies this year.
In its new forecasts, just released, the OECD predicts UK inflation of 7.2% for 2023, increasing its previous forecast of 6.9% from June.
This would be the fastest rate across the G7 and third fastest across the G20.
Chancellor of the Exchequer Jeremy Hunt said:
“Today the OECD have set out a challenging global picture, but it is good news that they expect UK inflation to drop below 3% next year.
“It is only by halving inflation that we can deliver higher growth and living standards.
“We were among the fastest in the G7 to recover from the pandemic, and the IMF (International Monetary Fund) have said we will grow faster than Germany, France and Italy in the long term.”
But Liberal Democrat spokeswoman for Treasury and business Sarah Olney is unimpressed by the OECD’s prediction that the UK will only grow by 0.3% this year (the third slowest in the G20, after Germany and Argentina).
Olney says:
“This damning report shows that under the Conservatives the UK economy is stuck in the slow lane.
“We’ve had zero apology from Liz Truss for trashing the economy, and now zero plan from Rishi Sunak to fix it.
“It’s time for a proper plan to grow the economy and tackle the cost of living.”
The rising oil price threatens to undermine the falling inflation rate in the eurozone, warns Richard Flax, chief investment officer at Moneyfarm.
Flax says:
Eurozone inflation fell faster than initially expected in August 2023, with the final data reading 5.2%. This is down from 5.3% in July and lower than the initial estimate of 5.3%. Compared to July, inflation fell across 15 countries, rose in 11, and remained stable in one. The significant contributors were food, alcohol, and tobacco (9.7% in August vs 10.8% in July) and services (5.5% in August vs 5.6% in July), while energy prices declined by 3.3% YoY.
However, a fresh inflationary headwind is on the horizon globally with oil prices continuing the climb towards $100 a barrel for the first time in a year. Brent crude is currently at an upwards of $95 a barrel, driven by concerns of a supply constrains after output reductions from Saudi Arabia and Russia have been extended to the end of the year. With OPEC+ announcing a deficit of 3 million barrels for Q4 2023, $100 per barrel remains very much in sight.
The elevated cost of energy will be concerning for central banks as this can add to the inflationary pressures at a time when they are aiming to end the tightening cycle.
There is a strong consensus that the Fed may leave borrowing costs unchanged tomorrow and not rule out a future hike, but the BoE may favour a rate hike on Thursday.
The drop in eurozone inflation to 5.2% last month could encourage the European Central Bank to stop raising interest rates, having lifted them to record highs last week.
Craig Erlam, senior market analyst for UK & EMEA at OANDA, says:
Eurozone headline inflation was slightly lower than initially reported in August while core was unrevised and is now modestly higher.
Both are expected to fall going into next year and today’s revisions are unlikely to alter the view of the ECB which has already decided that no more rate hikes will likely be needed. As with all favourable data though, it may come as a small relief that surprises in the data are finally in the right direction.
Euro-area inflation slowed last month after all, according to revised data that will support European Central Bank officials saying no more interest-rate hikes are needed https://t.co/XeP5EKt3Ph
— Bloomberg Economics (@economics) September 19, 2023
OECD lifts global growth forecast
The OECD has raised its forecast for global growth, thanks to a stronger than expected US economy, and despite a weakening German economy.
The Paris-based body has lifted its forecast for global GDP growth to 3.0% this year, up from the 2.7% forecast in June, but still slower than the 3.3% expansion in 2022.
But, global growth is expected to slow to 2.7% in 2024 – down from its estimate of 2.9% in June.
The OECD is rather more upbeat about the US economy than three months ago – it now predicts US GDP will grow 2.2% this year rather than the 1.6% it forecast in June. That’s because America’s economy has been more resilient than expected as US interest rates have been raised higher.
But China’s growth forecast for 2023 has been cut to 5.1% this year, down from 5.4% earlier forecast, with a slowdown to 4.6% next year.
Germany’s economy is now expected to shrink by 0.2% this year, down from a previous forecast of flat growth, followed by 0.9% growth in 2024 (down from 1.3% previously).
The UK economy is still expected to grow by just 0.3% this year, with 2024’s growth forecast revised down to 0.8% from 1%.
The OECD warns there is a risk that inflation will be ‘more persistent than expected”:
Headline inflation has continued to come down in many countries, driven by the decline of food and energy prices in the first half of 2023. However, core inflation – inflation excluding the most volatile components, energy and food – hasn’t significantly slowed. It remains well above central banks’ targets.
A key risk is that inflation could continue to prove more persistent than expected, which would mean interest rates need to tighten further or remain higher for longer.
Core inflation across the eurozone, which strips out energy, food, alcohol and tobacco, dropped to 5.3% per year in August, from 5.5% in July.
🇪🇺 Euro area inflation declined slightly on a YoY basis but remains elevated and far from the ECB’s target
Aug-23 HICP:
➡️ EA: 5.2% headline YoY (down from 5.3% in July and from 9.1% Aug-22) and 0.5% MoM; Core HICP is at 5.3% YoY
➡️ EU: 5.9% headline YoY (down from 6.1% in July… pic.twitter.com/znyLs5Lm1A— Nikolay Kolarov, CFA (@libertniko) September 19, 2023
Although the rate of eurozone inflation fell last month, that doesn’t mean prices are falling, of course.
On a monthly basis, eurozone consumer prices rose by 0.5% during August.
🇪🇺 Eurozone CPI (yoy) for August actual: 5.2% vs 5.3% previous; est 5.3%. Eurozone CPI (mom) for August actual: 0.5% vs 0.6% previous; est 0.6%. #stockmarkets
— Millions Capital (@Millionscapital) September 19, 2023
Eurozone inflation falls to 5.2%
Newsflash: inflation across the eurozone fell last month.
Consumer prices across the single currency area rose by 5.2% in the year to August, down from 5.3% in July, and lower than the 5.3% initially estimated for August.
The highest annual rates were recorded in Hungary (14.2%), Czechia (10.1%) and Slovakia (9.6%), while the lowest annual rates were registered in Denmark (2.3%), Spain and Belgium (both 2.4%).
Compared with July, annual inflation fell in fifteen Member States, remained stable in one and rose in eleven.
But this still leaves inflation well over the European Central Bank’s inflation target of 2%.
Food, alcohol & tobacco prices were 9.7% higher than a year ago, down from 10.8% in the year to July.
Services inflation dipped to 5.5% from 5.6%, while industrial goods inflation dropped to 4.7% from 5%
Energy prices continued to pull inflation lower; they were 3.3% lower than a year ago.
BP appoints first female CFO
Jillian Ambrose
Oil giant BP has appointed Kate Thomson as interim chief financial officer, stepping into the role after Murray Auchincloss left the post to become interim chief executive.
She will be BP’s first female CFO, a company spokesman confirmed.
The reshuffle at the top of the oil giant’s leadership team follows the shock exit of Bernard Looney last week amid an ongoing investigation into his undisclosed personal relationships with BP staff.
Auchincloss and Thomson, previously BP’s finance boss for production and operations, are under pressure to assure investors that the company’s sex scandal will not derail its ability to deliver on its strategy.
Auchincloss said Thomson brings “deep technical knowledge together with a detailed understanding of BP, and has a first-class track record of leadership across our finance function”.
On the rising oil price, Susannah Streeter, head of money and markets at Hargreaves Lansdown, says:
Oil prices are still staying stubbornly high, with the benchmark Brent Crude creeping up further, hovering around $95 a barrel as concerns wash around about just how tight supply will be over the coming months, particularly if China’s economy stops stumbling and gets on a more even footing.
Forecasts from the US Energy Information Administration that shale production is set to fall for a third month in a row in key regions is adding to the upwards pressure on oil prices.
Full story: Farage row: no evidence of politicians being debanked, watchdog set to find
Kalyeena Makortoff
The UK’s financial regulator is expected to say it found no evidence that UK politicians are being denied bank accounts or other financial services, after launching a review in the wake of the Nigel Farage debanking row.
The Financial Conduct Authority (FCA) is due to release the results of its review by the end of the week, aftercontacting banks last month.
The review is expected to say there is no evidence to show that individuals are being denied services primarily on the basis of their political views.
The International Monetary Fund and the World Bank are pressing on with their plan to meet in Marrakech next month, despite the devastating earthquake that has killed almost 3,000 people.
The meeting will take place from October 9th to 15th in Marrakech, just 45 miles (72 km) from the site of the 6.8-magnitude earthquake.
In a joint statement, World Bank President Ajay Banga; International Monetary Fund (IMF) managing director Kristalina Georgieva; and Kingdom of Morocco minister of economy and finance Nadia Fettah Alaoui, says:
“Since the devastating earthquake in Morocco on September 8, the World Bank and the IMF staff have worked in close coordination with the Moroccan authorities and a team of experts to thoroughly assess Marrakech’s capacity to host the 2023 Annual Meetings. In undertaking this assessment, key considerations were that the Meetings would not disrupt vital relief and reconstruction efforts, and that the safety of the participants can be assured.
Based on a careful review of the findings, the Managements of the World Bank and IMF, together with the Moroccan authorities, have agreed to proceed with holding the 2023 Annual Meetings in Marrakech from October 9 to 15, adapting the content to the circumstances.
As we look ahead to the Meetings, it is of utmost importance that we conduct them in a way that does not hamper the relief efforts under way and that is respectful to the victims and the Moroccan people. At this very difficult time, we believe that the Annual Meetings also provide an opportunity for the international community to stand by Morocco and its people, who have once again shown resilience in the face of tragedy. We also remain committed to ensuring the safety of all participants.”
Together w/ the @WorldBank and the Moroccan government, we are announcing today that our Marrakech Annual Meetings (Oct 9-15) will take place. We have been assured that the city can host the Meetings safely & they would not hamper recovery efforts. [1/2] pic.twitter.com/a2ZielyOjT
— Kristalina Georgieva (@KGeorgieva) September 18, 2023
We commend the Moroccan authorities who have worked very hard on these Mtgs for several years & now under more challenging conditions than ever. We will come to🇲🇦with all our hearts, eager to make a success of the Mtgs & to highlight 🇲🇦’s resilience. [2/2]https://t.co/SQBh8P3UAY
— Kristalina Georgieva (@KGeorgieva) September 18, 2023
In the City, B&Q owner Kingfisher has cut its full-year earnings outlook after being hit by wet weather and low consumer confidence.
Pre-tax profits at Kingfisher dropped by a third in the six months to 31 July, the company reported this morning, to £317m from £474m. Like-for-like sales were down 2.2%.
Thierry Garnier, chief executive officer, says:
“Our LFL sales in H1 were slightly ahead of expectations, against a backdrop of unseasonal weather and ongoing macroeconomic challenges in our markets.
Although sales in the UK & Ireland were up 1.7%, they fell 3.8% in France and by almost 11% in Poland.
Josh Warner, market analyst at City Index, says:
Kingfisher missed the mark in the first half and warned profits will fall further than previously anticipated over the full year. Analysts already had doubts over its annual goal but the cut today was much sharper than hoped thanks to tepid sales and because the inflationary environment is weighing on margins.
The options markets are now pricing a 45% probability of Brent staying above $90/bbl by January 2024, reports Stephen Innes, managing partner at SPI Asset Management.
There is also a tail risk that oil is repriced higher, Innes says, adding:
Still, many in the oil markets think OPEC+ is unlikely to pursue prices over $100/bbl, but they see near-term bullish risks to their forecasts from recent developments.
The recent surge in oil prices, which have reached a 10-month high of $95 per barrel (bbl), is causing ripples across the global economy and financial markets. One of the contributing factors to this surge is the extended unilateral output cuts implemented by major oil-producing nations like Saudi Arabia and Russia. These cuts have effectively tightened the global oil supply, pushing prices higher.
This rise in oil prices carries significant implications for inflation. Oil plays a crucial role in various industries, and as energy costs increase, it tends to lead to higher prices for goods and services. Consequently, there’s a growing concern about the potential inflationary pressures this could exert on the global economy, potentially leading to an unfavourable shift in the global growth/inflation balance.
The main story at the start of this week has been the “relentless rise” in the oil price, says Jim Reid, strategist at Deutsche Bank.
Reid told clients this morning:
The recent rises are already filtering through into retail gasoline prices, with the US daily average from the AAA at an 11-month high of $3.88/gallon on Sunday.
Given those fresh signs of inflationary pressures, investors moved to price in that interest rates would remain higher for longer into 2024.
For instance, the rate priced in for the Fed’s June 2024 meeting hit a new high for this cycle at 5.16%, suggesting that investors don’t expect much in the way of cuts anytime soon. It was the same story for other central banks, with the June 2024 rate for the ECB (+7.9bps) and the BoE (+2.2bps) also moving higher.
FT: UK regulator finds no evidence of politicians being ‘debanked’ over views
A review by the chief UK financial regulator has reportedly found no evidence that politicians are being denied bank accounts because of their views.
People briefed on the findings has told the Financial Times that the Financial Conduct Authority’s probe into ‘debanking’ has not found any cases where political views were the “primary” reason for personal account closures.
The investigation was launched in August, called by chancellor Jeremy Hunt in the furore over the closure of Nigel Farage’s Coutts bank account.
Farage had claimed that Coutts decided to close his account because his views “did not align” with the lender, sparking a row over free speech in the UK, and claims of discrimination.
The FCA is aware the data used in its review was compiled quickly and that not all banks have good systems for monitoring and recording why accounts are closed or refused, said two people briefed on its work.
They added that the regulator would carry out further work to ensure that banks and payment companies are not unfairly denying access to services.
A 40-page document compiled by Coutts showed that the bank decided to put Farage on a “glide path” to be exited as a customer once his mortgage expired, as that put him below the qualifying threshold to be a customer.
But the Coutts dossier also warned of an “increased reputational risk” of continuing to bank Farage. It said his opinions did not align with the bank’s own views, and that Farage was “considered by many to be a disingenuous grifter”.
Farage is not happy about the FCA’s findings, telling the Financial Times last night:
“This is farcical. There are plenty of examples of prominent Brexiteers being debanked. The FCA are part of the problem.”
Introduction: Oil hits $95 per barrel amid supply worries
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The oil price is continuing its march towards $100 a barrel for the first time in almost a year, creating new inflationary headaches for central bankers.
Brent crude, the international benchmark, has pushed over $95 per barrel this morning, the highest since November 2022.
Oil is being driven up by concerns of a supply deficit, following recent output cuts by Saudi Arabia and Russia, which have been extended until the end of this year.
Kyle Rodda, senior financial market analyst at capital.com, says:
Despite looking technically overbought, the upside momentum looks strong, with a combination of supply and demand drivers supporting the rally. Of course, the big story here is the expected shortfall in supply flagged by OPEC+ last week.
The cartel says it sees a deficit of 3 million barrels per day in the final quarter of this year, which would be the largest since 2007. The increase in oil price is fuelling higher yields, especially at the long end, although equity markets have proven surprisingly resilient.
Brent crude began 2022 below $80 per barrel, before soaring to around $130/barrel after Russia invaded Ukraine last March – fuelling the surge in inflation last year.
Oil did then fall back, but has been climbing since the end of June, pushing up petrol and diesel prices in the UK, for example.
Higher oil prices risk making inflation more persistent, just at a time when central bankers are inching towards ending their cycle of rising interest rates. The US Federal Reserve may leave borrowing costs on hold tomorrow, though the Bank of England may vote to hike again on Thursday.
$100 per barrel is in sight now. And Bjarne Schieldrop, chief commodity analyst at SEB, predicts that oil demand will weaken should prices continue to rise, over $100/barrel.
Schieldrop says:
“The overall situation is that Saudi Arabia and Russia are in solid control of the oil market. The global market is either balanced or in deficit and both crude and product stocks are still low.
Thus we have a tight market both in terms of supplies and inventories, so there should be limited downside in oil prices. We are highly likely to see Dated Brent moving above USD 100/b. It is now less than USD 5/b away from that level and only noise is needed to bring it above.
The agenda
-
10am BST: OECD’s global economic outlook
-
10am BST: Eurozone inflation report for August
-
2.15pm BST: Business and Trade Secretary Kemi Badenoch appears before the Business & Trade Committee
