Finimize - 📉 Oil could slip up central banks

What’s going on here?

A key benchmark of US oil prices hit its highest level in over a year.

What does this mean?

West Texas Intermediate (WTI) crude oil’s price ticked up by 3.6% on Wednesday evening, landing above $93 a barrel for the first time in over a year. That came on the heels of a report that showed supply at a key US oil storage site hit its lowest level since July 2022, with inventory verging close to the minimum needed for the site to function properly. This bigger-than-expected dip is the latest evidence that supply cuts from Russia and Saudi Arabia – set to stay put for the rest of the year – have been piling pressure onto the market. And with OPEC (the group of major oil-producing nations) forecasting earlier this month that global markets may face the biggest deficit between supply and demand in over a decade, many market watchers see a $100-a-barrel price tag as inevitable.

Why should I care?

For markets: Just when we thought we were out, oil pulls us back in.

Hedge funds are backing that $100 prediction, pulling their bets on oil futures up to an 18-month high. If they’re right, the price of oil will have climbed over 40% in the second half of this year. That’s more than enough to light up inflation, and could potentially undo central banks’ hard-won progress and force them to keep economy-busting interest rates higher for longer.

The bigger picture: Green linings.

Still, the International Energy Agency may be cheering on this whole debacle, since higher oil prices could encourage the world to use more alternative energy sources. After all, the agency’s latest assessment concluded that if governments want to limit global warming to 1.5°C by 2050, demand for fossil fuels will need to fall by a quarter by the end of the decade. Specifically for oil, that’s a plunge from today’s 100 million barrels a day to 77 million by 2030 – and that could be a long shot.

What’s going on here?

Global deal activity has plummeted to a ten-year low.

What does this mean?

Barely any boardrooms have witnessed a firm negotiation and a handshake to match lately. In fact, only $2 trillion worth of merger and acquisition deals have been signed so far this year – the lowest total since 2013 and a 28% slip versus the same period in 2022, according to data from the London Stock Exchange Group. And sure, three multi-billion-dollar deals got the finance world talking in September, but a murky outlook and sky-scrapingly high financing costs mean you shouldn’t bank on many more following suit. Case in point: there were 42% fewer $10 billion-plus deals made in the first nine months of 2023 compared to the same period last year. That puts the total value of global deals on track to post a double-digit dip for two years in a row – a first since the 2008 financial crisis.

Why should I care?

For markets: It’s all too quiet.

Big banks make big money from advising on deals, so empty boardrooms aren’t a good sign for their books. Worldwide investment banking fees slipped 12% over the first nine months of this year versus the same period last year, with the third-quarter total hitting its lowest mark since the start of 2016. That’s an issue for the payroll, so major banks are set to slash over 11,000 roles this year.

The bigger picture: Climate, please change.

This slowdown in dealmaking is yet another sign that high interest rates are taking their toll on the economy. Rising rates have made it ridiculously expensive for companies to borrow the cash they need to fund acquisitions. And it’s been especially tough for private equity firms, which tend to be more aggressive and rely heavily on cheap financing to magnify their returns.