As I type this, the price of Brent crude oil has fallen below $50 a barrel for the first time since May 2009.
In response to the falling oil price, stock markets have been falling as well this week, getting the year off to a pretty depressing start (from an investment perspective, at least).
The FTSE 100 index of leading UK company shares is currently trading at 6,398.44, up around 0.5% on the day.
Oil prices are falling as a result of slowing global economic growth combined with an increased supply of oil.
We expect to see the price of oil continue to fall, as shale oil producers in the US keep producing more and OPEC resists pressure to cut production.
Anything around $40 a barrel in the coming weeks seems like a reasonable prediction.
The most insightful commentary I’ve seen to date around the subject of falling oil prices and their impact on stock markets comes from Dominic Rossi, Global CIO of Equities at Fidelity Worldwide Investment.
Here’s what Dominic had to say on the subject yesterday:
“As financial conditions tighten, this is having a knock on effect on those markets which are most vulnerable to a deflationary event; commodity markets and global emerging markets. Naturally, it’s also very beneficial for bond yields.
“Investors should try to look through this current volatility and recognise what we are witnessing is what we saw in the 1980s and 1990s. A collapse in oil and commodities generally effects a re-distribution of wealth from commodity producing to commodity consuming countries.
“Therefore we should consider this to be a material tax cut for both the US and European economies. The equity markets will soon refocus their attention on the benefits of falling oil prices.”
Will this be the same as we saw in the 80s and 90s, or something different?
If these predictions are correct, we might expect to see stock markets bounce back as investor sentiment shifts towards the benefits of a lower oil price.
Only time will tell.
