Global Markets

Deflation: US oil prices collapsed below $100 a barrel yesterday for the first time since May

We’re kicking off with a word you’ve waited so long to hear: “deflation.” It may not be as good as you think, though.

US oil prices collapsed below $100 a barrel yesterday for the first time since May, accelerating their decline over much of the past month. While that’s certainly a hopeful sign for gas prices, it also shows that investors are betting the economy is going to experience a bumpy landing on its way down from its inflationary heights.

Let’s dwell on the positive aspects of the oil price plunge a little bit longer, because it’s more fun. As oil prices have slid from their peak, so have prices at the pump.

  • Retail gasoline prices have now fallen for 21 straight days, which is the longest streak of daily declines since the lockdowns of April 2020.
  • The average US gas price right now is $4.80 a gallon. At those levels, you still want to cry every time you see the needle hovering near “E” on your dashboard, but prices have cooled from a peak above $5.

Why this is happening: It all comes back to the Fed. In its heavyweight fight to bring inflation back from 40-year highs, the central bank is hiking interest rates to cool off the economy. Investors are betting that demand for fuel from individuals and companies alike is going to drop relative to supply, which to date hasn’t dropped off like many predicted due to the war in Ukraine. Citigroup is perhaps the most bearish of all—yesterday the bank predicted that oil prices could fall to as low as $65/barrel in the event of a recession.

Commodity prices everywhere are dropping

Oil is just one of many commodities that has hit the downhill over the past several months after skyrocketing in price, suggesting that the Fed’s actions to combat inflation are working. Wheat, corn, and soybeans have now all fallen below their prices at the end of March, the WSJ reports.

Copper, the metal that’s seen as the best gauge of economic activity because it’s used in many different types of products, has dropped to a 17-month low over recession concerns. It’s on the brink of a bear market, and every recession of the last 30 years has followed a bear market in copper, per Insider.

Bottom line: The cooling commodities market could be telling us two things: 1) Inflation may be on the way down and 2) the economy may soon hit a rough patch.—NF SOURCE: Morning Brew

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