When the Bank of England said weakening commodity prices were a factor in its interest rate decision yesterday the key commodity in question was oil.
The oil price has lost a third of its value since the terrorist attacks on the United States, falling from nearly $30 a barrel before the September attacks to just $20 a barrel now. Economists attribute this directly to weakening demand in the face of the global economic slowdown rather than increased supply from producers.
The falling oil price has helped keep the lid on inflation and pave the way for lower interests rates as petrol forecourt prices fall and energy costs for businesses reduce too. Economists say those trends will continue.
New figures yesterday from the British Retail Consortium showed that high street inflation was virtually non-existent in October. Its Shop Price Index revealed that prices on a range of commonly bought goods were just 0.5 per cent higher in October than the same month last year. This was attributed partly to falling prices of non-food items during mid-season sales.
The major oil companies, like BP and Shell, have been calling on Opec to cut oil supplies to boost the price. The organisation appeared to be moving in that direction yesterday when Saudi Arabia, the world's biggest oil exporter, said the cartel could cut supplies by more than previously thought.
The Saudi oil minister Ali al-Naimi said Opec could cut production by 1.5m barrels a day. "A cut of 1.5 million barrels per day is an easy option," he said. Referring to Opec concerns that non-Opec members, such as Russia, might take advantage of the move to grab market share, he added that "it would be nice" to see non-Opec members contribute with a cut of 500,000 barrels a day. The comments boosted the price of a barrel of Brent crude by 74 cents to $20.07.
Opec oil ministers meet in Vienna next Wednesday and Opec's secretary-general, Ali Rodriguez, confirmed yesterday that the likely outcome was for a 1 to 1.5 million barrels per day reduction. Opec wants to push the price to a target level of $22 to $28 a barrel but economists say that may prove impossible.
Oil broker Lawrence Eagles of GNI said: "The Saudi comments are definitely bullish in the short term but OPEC is fighting a powerful foe in the global economic slowdown."
Matt Wickens, an economist at ABN Amro, said the "synchronised global slowdown" meant no economy was immune. "Demand is collapsing and that will hit oil."Reuse content