Crude has lately shown the weakness I expected back in March. I believe this is the beginning of a new cyclical bear market that relates both to a change in the resource intensity of growth ahead (especially in China) as well as a surge in supply – both of shale gas (a story that by now is well known) and in shale oil (a story that is still very much under-appreciated). The weakness we have seen to date should in itself be sufficient to lead to a boost to global growth, and if sustained – as I think likely – this should certainly lead to a cheerier tone to the mood in commodity consuming nations.
Of course the bears have seized on this as an indication that we are again seeing a repeat of the events of July-December 2008, but I am pretty sure that they are dead wrong.
I wrote in September about a likely rotation in global growth away from commodity producers towards commodity consumers. Nature once again seems to be smiling upon us. Let us hope She continues to do so.
The chart below shows crude prices (inverted) versus the Citibank index of economic surprises in G10 economies. Crude prices are lagged four months – recent weakness suggests growth ought to start surprising to the upside, perhaps starting in September.