Energy prices are set to fall right back down to Earth
Even though oil prices hit new records at $147 on Friday, sentiment in the energy markets is slowly starting to shift.
If you want proof, recall the events of last Wednesday. Traders in London woke up to pictures of Iranian missile tests and later in the day were forced to digest a large draw in US oil reserves. Both items should have sent the energy markets soaring, and two weeks ago they certainly would have done, but at the end of trade on that day front month crude settled in New York was in negative territory.
So while oil prices are still drifting up, the interesting talk in the energy pits is now of traders buying insurance to protect themselves against the risk of a big move lower. This is something that every investor in every asset class needs to pay attention to.
Over the last few weeks equity markets have finally succumbed to the forces of economic gravity. I believe that the energy markets could now be about be to follow, especially given that fears about a coordinated slowdown in both the developing and emerging markets start to gain traction.
If the price of oil were to come lower, even by a relatively small amount, say to $100 a barrel, then year-on-year inflation figures could be affected dramatically. Such a development would put central banks in a difficult position. With no primary inflation to deal with and with a lower risk of second round effects the emphasis would shift to slowing growth.
For us in Britain the prospect of looser monetary policy appears highly appealing. After years of boom, the outlook for the housing market is now looking bleak.
However, nobody should be fooled into thinking that lower rates are going to allow us to avoid a painful correction. Years of excessive lending have lead to a bubble that must now be deflated. While the Bank of England may be able to soften the blow, one only has to look to the other side of the pond to see that while the Federal Reserve in Washington has already cut interest rates aggressively a full blown housing correction is still underway.
Guy Johnson co-anchors European Closing Bell and Europe Tonight, weekdays on CNBC Europe.