Falling oil prices dampen inflation concerns while fueling economic fears

For drivers, falling fuel prices are pleasing, but behind the declining fuel costs lie complex global developments. The drop in oil prices is not coincidental; it reflects weaker global demand. The sharply increased crude oil and natural gas prices had fueled inflation over the past few years. Since the beginning of the year, however, the price of oil has significantly declined. It has nearly halved since the peak levels in the summer of 2022. What conclusions can be drawn from this?

At first glance, we see only positives in falling oil prices, as transport and heating costs decline, alleviating inflation concerns. However, this development is no reason for euphoria, as troubling economic signals lie behind this price drop. The Brent crude oil price fell from over USD 82 per barrel in early August to just under USD 65 in mid-September, marking an almost three-year low. This decline is primarily due to a rapid slowdown in global oil demand growth, led by China. After the demand surged post-pandemic, growth is now drastically slowing – particularly in China, the world’s largest oil importer.

Oil demand is decreasing

To halt the rapid price decline, Saudi Arabia along with its OPEC+ partners pushed back the planned easing of voluntary production cuts by two months in early September. This is intended to give the alliance time to reassess demand trends for the coming year. Additionally, supply disruptions in Libya and the planned lift of additional production cuts of 2.2 million barrels per day by the end of 2025 are influencing market stability. Despite these efforts, OPEC+ may face a significant surplus, according to the International Energy Agency (IEA), as supply from non-OPEC countries is rising faster than global demand. Outside of China, demand growth remains subdued as well. In the USA, the world’s largest oil consumer, gasoline consumption fell in the first half of 2024 compared to the previous year. Similar developments are seen in other advanced economies, where structural problems and weak economic growth are dampening demand. While this lessens global inflationary pressures, economic activity also remains muted. Central banks worldwide have taken notice of this. While the European Central Bank (ECB) and the American Federal Reserve (Fed) are in the spotlight, 50% of all central banks (with freely convertible currencies) have already cut their interest rates to respond to the changing conditions.

Economic outlook weakens

For investors, this development means a strategic adjustment of portfolios is necessary. While the oil price decline reduces inflation fears, it simultaneously underscores increasing economic uncertainties. At Kathrein, we decided in April 2022 to exclude China from our asset allocation, not just due to the weakening economy but also because of the interventionist measures of the Chinese government.

Since the second quarter of 2024, we have also realigned our bond portfolios and extended durations to benefit from declining yields. In the equity sector, the energy sector was consciously underweighted to minimize the risks of falling commodity prices.

Overall, the oil price decline indicates that global markets are undergoing significant changes. The dynamics of the energy transition, weak global demand, and geopolitical factors will continue to influence prices and market conditions in the coming months. At Kathrein, we are closely monitoring these developments and continuously adapting our strategy. 

This information represents a market overview and the market opinion of Kathrein. It does not constitute a financial analysis and includes no direct or indirect recommendation for the purchase or sale of securities or an investment strategy. Investing in securities can lead to price fluctuations and therefore capital losses at any time. Figures and past performance do not offer reliable conclusions about future results.