Wednesday, August 7, 2013

Stock Market: Could An Oil Price Collapse Really Derail The Rally?

(Drivebycuriosity) - It seems there is always a season for scare mongers. Some analysts from the Deutsche Bank claim, that a "perfect storm" of structural, demand, and supply-driven factors could cause a "major pullback" in oil prices (businessinsider). This could "derail the rally in the U.S. stock market" (businessinsider).

I reckon that their conclusion is totally wrong.  A sudden drop of the oil price would work quite to the contrary and should be a boost for the rally on the stock market.

There is indeed a bubble on the oil market which is caused by continuous speculation of possible supply disruptions from the Middle East (driveby). Speculative purchases of oil futures by hedge funds and other players lead to a price that isn`t justified by the fundamentals. Because of the high oil prices consumers have been reducing their oil demand (demand destruction) while suppliers have been pumping more oil.

Todays oil price, which is around three times as high as in the 1980s and 1990, is slowing the global economy (driveby). A sharp drop of the oil price would work like an enormous global tax cut. Consumers worldwide would have more money to spend for other goods and services. Hence a major pullback of the oil price would boost global consumer spending which is the engine of world economy. The majority of companies would benefit. Companies also would operate with fewer energy costs and hence generate higher profits.

Sharply falling oil prices also would cause even lower inflation rates that would lead to reduced interest rates.

A sudden drop of the oil price also could demoralize the oil speculation. Billions of dollars which are now invested in oil futures could flow into the stock market.

No comments:

Post a Comment