In the red corner oil in the blue corner US interest rates

Without particularly wishing to add to the mountain of words that have been written discussing the ins and outs of Brexit. We would like to make just one observation. During any political event, what one should always take note of is what the market is telling you, one would suggest in particular the currency. Europe’s recent rhetoric has been suggesting they are close to a deal, probably trying to force the outcome. On the other hand, there is also talk of a strong possibility of a no deal being expressed. One would expect, if the outcome was a no deal sterling would suffer. Despite the talk of no deal and threats of mutiny within the Conservative ranks, recently sterling has been resilient against both the US dollar and the Euro. This could suggest that speculators believe that a no deal outcome is unlikely. It could also suggest that the market is backing Theresa May’s ability to persuade parliament that a watered-down Brexit is acceptable. The bookmakers now have 2019 as the front-runner for the year of the next general election.

There has been a lot of focus on the US interest rate policy and the release of this week’s minutes from the Federal Reserve’s last meeting will make more headlines. However, there is one thing that is sure to cause a slowdown in economic growth and that is a spike in the oil price. Tensions in the Middle East, related mainly to Iran, have already caused the oil price to rise above 80 dollars a barrel. The suspected death of Jamal Khashoggi and the subsequent allegations that the Saudi governments may be involved. This has led to several prominent businessmen pulling out of a proposed high-profile Investment conference due to be held in Saudi. Which has added to further tensions in the region. The Saudi government has an unwritten commitment to not use the oil price as a weapon in the global economy, however as the largest producer of oil in the world they can control the price as much as any nation.

We saw a couple of years ago how the Saudi’s decision to flood the world with oil led to the price falling to 30 dollars a barrel. This had the effect of reducing the ability for many to produce oil at these lower prices. The taps were then slowly turned off and the rise started. Producers were not able to react quickly. As much as US interest rate policy can dominate the growth of the global economy, the Saudi’s ability to govern the price of oil is just as important and arguably even more important to the strength or otherwise to the world economy. 

 

Posted on October 16, 2018 .