Are We Headed Towards an Economic Slowdown? The Potential Impact on the Energy Market

Article by Ed Fortunato

Maybe it’s the change of season but views on the economy may be starting to change too. I know, the world seems like a dangerous place with the recent attack on Saudi oil, Israel bombing Iran in late August, and Japan squaring off versus South Korea and I didn’t even mention other conflicts such as in Hong Kong, China, Venezuela or Russia. What is going on?  As the U.S. retreats from certain areas, like the Middle East and Asia, old grievances redevelop, power vacuums get filled and contenders strive to dominate. On top of it, the economy globally appears to be slowing and plentiful money–a result of monetary easing–appears scared and looking for a haven.

How are the markets reacting? They are reacting with volatility as certain bedrocks of market stability erode, corporate profits, economic indicators, yield curve and interest rates. Investors move from confident and greedy to scared and fearful, and money flows in those directions.

We have seen $14 trillion of debt investments pay negative interest rates, meaning the central bank requires financial institutions to pay money to keep excess reserves in the bank.¹  This is can be viewed as a tactic by the central bank to address deflation by reducing interest rates to encourage consumers and businesses to spend money and raise prices.² For example, a German 10-year bond is paying negative 0.66%. One hundred dollars could get you $99 back next year and $90 back in ten years.

Why am I worried about the economy and equities when we are an energy firm not a brokerage firm? Equities can be viewed as a leading indicator of the economy; the economy can have an impact on energy demand and could have an impact on gas exports. Economic demand is considered important because two-thirds of the U.S. economy is driven by consumer spending.

If consumers start to tighten their belts, it could impact industrial demand (e.g., new car and home sales, leading to less oil/gas usage to heat homes or power cars) as well as commercial demand.  A slowdown in global economic activity could impact both U.S. oil and liquefied natural gas exports and prices. If we export less oil and gas to other countries, then we could have to pull less energy out of storage to meet Americans’ needs, potentially lowering prices. Supply could surpass demand. Lower fuel costs could have downward pressure on power prices. Demand could eventually recover but it could result in downward price pressure for some customers.

We will keep an eye on that and the prices for international gas and keep customers posted. To stay apprised of the latest updates, sign up for our regular email communications, such as the eMarket Update and Energy Market Intel Webinars by visiting www.constellation.com/subscribe.

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References

1. https://www.bloomberg.com/news/articles/2019-08-01/sub-zero-debt-pile-hits-record-14-trillion-as-fed-cuts-rates
2. https://www.thebalance.com/what-negative-interest-rates-mean-for-investors-1978886

Guest Author: Ed Fortunato, Managing Director – Fundamental Analysis
Ed Fortunato is the Managing Director of Fundamental Analysis at Constellation, an Exelon Company and responsible for providing fundamental views of the economy, oil and natural gas. Ed has spent more than 15 years with Exelon having begun his career managing the proprietary trading book, the short-term analytics group and has lead the implementation of trading strategies in both the prop and hedging books since his arrival. Ed has an MBA with high honors in finance from Boston University and a BBA from Baruch College.