The price of oil is telling us something worrying about the global economy.
Despite recently announced production cuts by OPEC+ (The Organization of Petroleum Exporting Countries plus Russia), Brent crude oil prices continue to decline.
It’s a sign that global growth is slowing, increasing the risk of a worldwide recession.
A barrel of Brent crude oil recently fetched $78, down from $86 at the end of last year, according to data collated by Trading Economics. It was as high as $121 last June.
The price of oil get determined by demand and supply. When supply is reduced, as happened recently via OPEC+, then observers would expect the price to rise. Of course, when demand for that energy falls even more, then prices of crude will drop.
And that’s just what seems to have happened.
Falling demand is tightly tied to a reduction in economic activity of all types. When consumers aren’t buying as many things, manufacturers stop making things to sell, and some workers lose their jobs. These things are already happening.
Whether that results in a recession is something different. However, the more the global economy slows down, the greater the risk that key economies start to shrink.
A recession often gets defined as two back-to-back quarters of negative growth. As growth edges closer to zero, then it should be evident that the risks of dipping below the zero level are increased.
Why do we care? Suppose the world, including the U.S., enters a recession. In that case, history tells us that certain sectors will do better than others. Typically, consumers pull back on purchases they don’t have to make. If you don’t need a new car, then during a recession, its less likely that you’ll buy a new one.
However, some things, such as toothpaste and soap, will always get purchased, even when the economy is receding. These items are known as consumer staples and if, and its still a big if, then investors would be smart to buy shares of companies that sell such items.
That can easily get done via Consumer Staples Select Sector SPDR Fund (XLP) exchange-traded fund, which holds a basket of such stocks.
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