In late June, Brent oil was trading at $114 per barrel, by the end of September it was at $95 and yesterday it fell below $72, a level not seen since 2010.
Why Has it Fallen?
Demand – since the summer there has been a noticeable slowdown in manufacturing activity across the world, most particularly in China, Asia, Japan and Europe. Though service sector activity has held up better than manufacturing, manufacturing is generally a high consumer of oil as a key cost of manufacturing and in transporting the goods from the place of production to the place of consumption.
Supply – In recent years oil production in the US has been increasing steadily as production from shale facilities has been picking up. Shae oil uses the recently developed fracking technologies that brings to the surface oil that with previous technologies could not be accessed.
OPEC – at the recent OPEC meeting, Saudi Arabia refused to take the lead in seeking to build a consensus for a co-ordinated cut in OPEC output. Nothing was agreed and so the current over-production of oil relative to demand looks set to remain.
Is this Good or Bad for Stock Markets?
A falling oil price is usually seen as good for most shares as it means lower costs for most businesses – with the exception, of course is oil producers, who see their revenues falling and lower petrol prices which take a couple of weeks to come through to the pumps. The price drop acts like a tax cut for consumers, which might be handy in boosting their confidence just before Christmas.
However to the extent that the falling oil price represents falling global demand, this highlights a slowing in growth. In addition, in the US the recent strong performance of investment spending has been especially concentrated in the oil sector, and this dramatic fall in the oil price is likely to curtail sharply this spending. This key component of US GDP growth is set to reverse.
Geopolitically, the lower oil price matters because it damages the Russian economy and Putin may be tempted into a foreign policy excursion that would divert Russians attention from their domestic problems.
