Crude Raid to $100 Could Expedite Global Slowdown

Brent crude prices are rising by 1.3% to $90.50 per barrel of Brent crude this week. This is the best performance in seven consecutive days since May 2023. The question is how long crude price would increase further considering a global economy slowdown.

Macroeconomic data in developed countries now corresponds most with the end of 2022 and autumn of 2020. This is low performance, and in both cases crude prices were under pressure. This time it is totally different. Crude prices are rallying by 20% since July, and are likely to continue up. Capital inflows in the most popular United States Oil Fund LP (USO) ETF during the first week of September are huge at $257 million compared to $200 million outflow during the last three months. When crude prices last were rallying during eight consecutive days in May 2023, capital inflows in USO during the whole month of May were at $272 million. 

Technical picture is even more exciting as it signals crude prices could go much higher. If Brent crude prices would pass the resistance at $92.00-94.00 the emotional targets at $97.00-102.00 and $109.00-111.00 could be reached. Prices at $100 per barrel will alert many investors, while prices at $110 could lead to a panic, a new wave of higher inflation and may result in Federal Reserve’s (Fed) interest rates hike.

Investors are very sensitive to inflation issues now, as a slowdown in inflation support hopes for lower rates by the Fed. Markit reported its September Services PMI at 50.5 points down from 52.3 points. S&P Global Composite PMI was down to 50.2 points in August compared to 52.0 points in July. These data confirm economic slowdown in the United States that is likely to result in lower inflation. ISM reported its Non-Manufacturing PMI at 54.5 points in August, up from 52.7 in July, and Non-Manufacturing Employment at 54.7, up from 50.7 points. 

Such contradiction is not a reason for panicking, but investors were frightened by these figures. 10-year U.S. Treasuries yields rose to 4.29%, while the odds for interest rates hike of 0.25% by the Fed in November rose to 40% from 34% before this release.

The overall situation has become alarming, as the U.S. Dollar is strengthening, while crude prices are rallying whipped up by Russia and Saudi Arabia with new production cuts. Both countries have confirmed production cuts of 1.3 million bpd by the end of 2023.

This situation may result in a full-scale crisis, as rising crude prices will speed up inflation, which will be translated into higher debt yields and strong U.S. Dollar. So, crude will become extremely expensive. This will accelerate a slowdown of the global economy and will push it into recession. So, if Brent crude prices will surge above $100.00 per barrel they will drop sharply dragging the Greenback and yields also down. So, this resistance of $92.00-94.00 per barrel for Brent crude is indeed of paramount importance for all markets.