What the recent oil price drop means
With recent headlines focused squarely on the U.S. – China trade dispute and the possibility of an interest rate cut from the Federal Reserve, few have noticed that crude oil prices have been in steep decline since last fall. Prior to last October, crude oil prices had been locked into an uptrend since the beginning of 2016, as global demand remained firm and global economic growth expectations were fairly robust.
But that growth narrative has faded, with most economists now worried about flat or softening growth rates. Crude oil prices seem to be responding in kind to this sentiment shift.
Instead of getting caught up in worry, I suggest keeping emotions out of it and staying focused on the long-term and key economic indicators. To help you do this, we are offering all readers a look into our just-released Stock Market Outlook report.
This 40-page report contains some of our key forecasts to consider such as:
- What to expect from Global Markets?
- Details on why “China Trade War” remains the big stumbling block.
- Why are Zacks strategists (including me) staying bullish?
- Stock market returns expectations for 2019
- Why U.S. GDP Growth should be a top-of-mind fundamental?
- And much more…
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Crude Oil Prices in Decline Since October 2018
Source: Federal Reserve Bank of St. Louis; U.S. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma2
From a peak of $75.13 in October, crude oil prices now hover below $55 a barrel – even amidst supply concerns emerging from geopolitical tensions involving Iran. Prices saw a boost when the U.S. blamed Iran last week for the attacks on two tankers in the Gulf of Oman, as any type of military confrontation could have significant consequences for oil supply moving through the Persian Gulf. 3
But the market appears more concerned with excess supply and inventory of crude oil, as global demand levels off and as the probability of recession rises. On the supply side, the market is contending with a spike in U.S. stockpiles which recently hit multiyear highs. The ongoing shale production boom in the U.S. continues to keep inventories near record highs, even as the summer season takes hold (which usually leads to higher demand and falling inventories). This is arguably why the market has appeared to shrug off any threat of a supply disruption in the Middle East.
On the demand side, investors are increasingly worried of a global slowdown tied to the late cycle headwinds and the ongoing trade dispute between the United States and China. The Energy Information Administration and the International Energy Agency both lowered their forecasts for 2019 global oil demand growth, as GDP growth forecasts soften across the developed world and as trade forecasts move lower in lockstep.
China in particular has downgraded growth forecasts as manufacturing and industrial production numbers show early signs of weakness. For the month of May, industrial production growth in China was the slowest it’s been in years, with fixed asset investment also slowing. Manufacturing PMIs around the developed world are also flashing yellow, with confirmed contractions (readings under 50.0) in South Korea, Japan, Taiwan, Malaysia, Russia, Poland, Turkey, Italy, Germany, and the U.K. China and Spain are stagnating but seem to be on the verge of contracting.3
The capital markets (with the exception of the stock market which appears to be pricing a rate cut) have shown signs of concern over slowing growth, with assets pouring into safe havens like U.S. Treasuries, German Bunds, and Japanese Bonds – driving yields to historic lows. Other commodities besides oil, like nickel and cotton, have been under pressure as well as the trade talks between the U.S. and China collapsed.
Bottom Line for Investors
Oil and commodities prices are inherently volatile – remember, we saw a 50% price drop in crude oil prices midway through the current economic expansion and bull market,4 and the expansion was not thrown off course. What we see today, however, is an interesting set of circumstances where global inventories are near record levels and global demand is slowly starting to turn over. Absent a re-acceleration of global growth expectations – which I do not foresee anytime soon – the major event to watch is whether the situation escalates with Iran, which could significantly impact supply expectations and could send prices higher.
In times like this, I recommend staying focused on hard data and key economic indicators. To help you do this, I invite you to download our Just-Released Stock Market Outlook Report.
This 40-page report is packed with our newly revised predictions for 2019. For example, you’ll discover Zacks’ view on:
- Inside the China tariff war.
- Why are Zacks strategists (including me) staying bullish?
- Small-cap and large-cap outlook in 2019.
- What of cuts in global growth?
- Business debt is at historic highs. How could a downturn impact this?
- And much more…
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