As a vital pillar in the global economy, oil has an impact on everyone’s life. Its impact is traceable. From the manufacture of plastics and cosmetics to byproducts like diesel and gasoline. Since its impact can be felt in every individual’s life, it also has an effect on the stock market.
According to Will Rhind, the CEO and founder of GraniteShares “the price of oil has such a predictive power because, like it or not, oil is ingrained in our lives.” When the price of oil increases, enterprising investors have an opportunity to profit.
As you already know, the price of oil depends on the forces of demand and supply. If supply exceeds demand, the price falls and if demand exceeds supply, the price rises.Brad McMillan, CEO for Commonwealth Financial Network headquartered in Waltham, Massachusetts said “ oil prices are typically quite volatile. Most of the price action you see is simply noise.” Problem is, the “noise” has a great impact on the global economy and stock markets.In the past week after a bruising October, US stocks and crude futures have experienced a tumble.
Now oil futures are down to 20% after a 52 week high in the previous month. This has led to the stock market almost becoming bearish.On the New York Mercantile Exchange, the price of a barrel was $60.19, a significant drop by 48 cents. In the past week at the time of writing, oil price had lost 4.7% of its value which marked a fifth straight weekly drop.
What are the causes of the plunging oil prices? At the start of 2018, the price of an oil barrel was more than 20%. This rise in oil price was brought about by tensions between China and the US. At the same time, looming sanctions on Iran had already begun. In early October 2018, the price of a barrel hit a four year high reaching $86.07 a barrel. This happened after Russia and Saudi Arabia agreed to increase production. In the same month, crude oil prices experienced a plunge $10 a barrel.
Quoting CNBC “ rising crude supply met the bearish combination of concern over global growth and weak equity markets.”On November 5th, 2018, fears of new US sanctions against Iranian oil exports projected an increase in crude price. These expectations appear to be false.
According to the major benchmark price for oil across the world, Brent Crude, the price of crude per barrel has continued to tumble. By November 12th, 2018, the price per barrel was $72.53.Since the increase in oil price ahead of an election is not something politicians would like to see.
The Trump administration granted a waiver to 8 countries which include China to import Iranian crude oil. This waiver grants these countries another 180 days to make the purchase. Thanks to the introduction of more than 1 million barrels from Iran which was not expected, supply exceeded demand and this has led to oil price per barrel plunging.
There are other factors which have contributed to the decline in oil prices. First, you have the skyrocketing US shale production. According to reports, there has been an increase of 400,000 barrels per day during the first week of November. This increases the total output to 11.6 million barrels in a day.
Second, you have OPEC which includes countries such as UAE, Russia, Libya, Nigeria, and Saudi Arabia. They have all increased production in the past few months. This was done to offset the losses from Iran after US sanctions.
Currently, OPEC is facing another problem. A committee will meet to take stock of the crude market. During the meeting, considerations are to be made on how to manage the crude market efficiently. This includes production cut in 2019. The decision to reduce production in 2019 is to prevent a market downturn.What does this mean for the stock market?
First, the plunge in crude prices may lead to an increase in hedge fund selling. This happens to lower the negative effects on equity owners. Experts expect a frenzy when it comes to the sale of hedge funds. Second, the Federal Reserve may increase interest rates. This is the fourth time the Federal Reserve has done so in 2018 and its expected to do so three more times in 2019.
This has been brought about by the prediction that the stock market is close to becoming bearish. As a result, many investors are now cautious when it comes to future returns.
Research shows that there is always a bounce after the first decline. This gives investors a chance to lower risks if signals are enough to signify further decline. So, even though the prices of crude oil are low, it’s a reflection that stock markets need to reset and begin afresh.