Oil traders’ view from the beach is not entirely sunny

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What connects an equity share in Tesla, a Louis Vuitton handbag and a barrel of Brent crude? 

The oil traders who have turned off their screens and hit the sun loungers from Saint-Tropez to Portofino will have plenty of time to think through that riddle during their long August lunches.

Suddenly, the roadmap they were expecting for the rest of the year – gradually returning barrels from the Opec+ organisation selling steadily into a picture of global economic growth – does not look quite so assured.

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The virtual meeting of the Joint Ministerial Monitoring Committee (JMMC) of Opec+ due this weekend will have a few more variables to factor into the modelling for the rest of 2024.

In the second half of July, global financial markets, some big economies and commodity prices all conspired to make for a less relaxing August than many had anticipated. 

The big global equities markets took a brief look over the precipice last week. They did not like what they saw and pulled back – but they remain uncomfortably near the brink.

What has bothered observers is that the worst-affected sectors are those that have been the bedrock of market resilience – technology, digital and AI.

Shares in the so-called “magnificent seven” beloved of Wall Street – Alphabet (Google), Amazon, Apple, Meta (Facebook), Nvidia, Microsoft and Tesla – lost between 7 and 17 percent last week.

Eurozone growth has slowed, led down by a German economy that seems to have lost its role as the world’s manufacturer of upmarket gadgets

Investors were unconvinced by results from Alphabet that the huge sums invested in AI were going to show through in real returns. Financial statements from four of the seven this week could alleviate those worries – or (just as likely) compound them.

If high tech is preoccupying America, in Europe it is upmarket handbags and gladrags that are causing investor concern.

Almost all the big luxury brands – Louis Vuitton, Gucci, Balenciaga, YSL and the rest of the bauble manufacturers – are experiencing falling demand for their expensive goods, and the shares have suffered as a result. LVMH – Louis Vuitton, Dior and many more brands – has one of the highest market capitalisations in Europe, but its shares are down 9 percent this year.

Moreover, eurozone economic growth has slowed almost to a trickle. It has been led down by a German economy that seems to have lost its role as the world’s manufacturer of upmarket gadgets from cars to turbines.

Which brings the oil analysts to China. The West is in a love-hate relationship with China, loving the huge and increasingly sophisticated market, but hating the efficiency with which it can manufacture and export products that compete with Europe and North America.

What they hate even more is a China that no longer wants, or cannot afford, Western products. Beijing’s well-known challenges in real estate and finance are trickling down the national economy to affect consumer confidence.

That is bad news for the likes of LVMH throughout the world. It’s too early to say what effect falling Chinese demand for luxury goods will have on, for example, Dubai, where Chinese tourists flock to buy these expensive fripperies in the emirate’s grand malls.

To the extent that consumer spending is a factor in national economic health, it becomes a problem for the world too – and for the Opec+ planners.

The International Monetary Fund has forecast that Chinese GDP growth will fall below 4 percent in the near future – the lowest rate for nearly three decades.

One of the assumptions the Opec+ experts must have made when they extended cuts in June, but with a gradual return beginning this October, was that Chinese demand for hydrocarbons would be showing definitive signs of recovery by the autumn.

Just a couple of months on, that is not guaranteed. Whether or not Opec+ can begin to unwind the 2.2 million barrels per day reductions from this autumn is still up in the air.

Certainly, the oil price is warning that there is little need for extra barrels for the time being. Along with US digital stocks and European luxury goods, the price of a barrel of Brent crude has fallen since the middle of the month – from around $85 to below $80.

Food for thought on the Mediterranean beaches.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE