Of ups and downs

By Benedict De Meulemeester

By Benedict De Meulemeester on 18/08/2009

Oil markets seem to be rather directionless at this moment. We saw some upward pressure in the past weeks with prices getting near and even shortly over the 75 dollar per barrel mark. But then on Friday, negative consumer confidence figures for the US had a depressing effect on the market and prices dropped back to near and shortly below 70 dollar. Coal and European power and gas markets broke slightly over their recent lows, but aren’t exactly rebounding either. Although it traded higher for most of the day, German baseload power for next year ended this day slightly lower than yesterday.

These ‘ups and downs’ in the energy markets are probably a good reflection of what is going on in the minds of everyone that is to assess the state of the world’s economy at this moment. (Expectations of) the economic situation is really what is driving the market right now. The price had its huge bear correction in the past year due to the economic downturn. It is therefore logic to presume that as the economy rebounds, demand for product (and speculative investment) will push prices higher again.

The upbeat news seems to be coming mostly from Asia these days. It looks like the emerging economies, China foremost, are recovering much more quickly than the rest of the world. It is not the first time that Asian economies show such vigour for economic recovery. They also recovered remarkably fast from their downturn in the late 90’s. An even more important feature of the current recovery is that it seems to be fuelled by inland consumption. Will the Asian economies reduce their dependency on exports as their wealthier populations adopt Western consumption patterns? Will a rich, money-spending Chinese middle class become the economic engine of the 21st century?

At the same time, developments in the US are also meaningful. The whole crisis started when over-borrowed US citizens started to default on their mortgages. For years, economists had highlighted the danger of US consumers spending much more than they could ever possibly afford or pay back. That bubble has burst. It would be foolish to expect that US consumption will just return to its old patterns. Many individual US citizens are probably now going through the painful process of learning to spend less. Hence, it is not surprising that consumer confidence is not recovering. The US economy might have a much harder time recovering, as it has to find something to replace its traditional strength of strong inland consumption.

Bad news from the US follows upon good news from Asia and prices make up and down swings. To me it is not odd that the economy is recovering in such a zigzag fashion. After such a deep downturn, it would be surprising to see an equally rapid upturn.

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