oil price

Wondering where global growth is headed this year? It might help to keep an eye on today’s oil prices .

A sharp drop in global oil demand that began in May was a “leading indicator” of slowing global growth, as the latest round of gross domestic product data from Europe and Japan have confirmed, says London consulting firm Energy Aspects.

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The price of Brent crude, the global benchmark, is down 12% from its mid-June peak, the result of tepid demand from European and Asian refineries as well as a perception of reduced geopolitical risk. While prices trawl 14-month lows near $101 a barrel, they are still too high to lure more demand from drivers and other consumers, Energy Aspects says.

“Overall weakness in global oil prices signal that demand has not really picked up” yet, the firm says. “This raises the question of whether the global economy and stock markets are due for a lurch downwards” later this year.

The Brent futures market points to sluggish demand. In July, the futures market for global benchmark Brent crude flipped out of backwardation – when the front-month contract is more expensive that contracts for delivery in later months. Brent is now in contango, meaning that the front-month October contract is cheaper than contracts for later this year and next.

Contango indicates that traders are buying near-term supplies at a discount because there are enough barrels to go around.

On Monday, Oman crude oil on the Dubai Mercantile Exchange flipped to contango as well. While Brent is most reflective of the European market, the contango in Oman suggests that the Asian market is also well-supplied.

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The link between global growth and oil prices does carry some caveats, of course. A geopolitical crisis that threatens oil production from Iraq, Russia or elsewhere could send prices soaring again. And oil demand typically falls in the late summer and early fall as refiners perform seasonal maintenance, so stronger global growth might not show up in oil prices right away.

Still, Energy Aspects says, demand for gasoline, diesel and other oil products could be an important indicator in the second half of the year.

“We are definitely not suggesting that the oil market is pointing towards a severe global recession, but [oil markets] may be telling us something about the state of the world economy which economic forecasts are currently not capturing,” the firm says.