On Monday, 5 January 2015, global financial markets were shaken by news that West Texas Intermediate Oil dropped below $50 per barrel. The energy sector has been rocked by price instability in the oil markets, with OPEC members standing firmly by their decision to allow market forces to determine price equilibrium. The price of oil has plunged more than 50% since June 2014, and downward pressure on the price looks set to continue well into 2015. The accelerating decline in oil prices has many commodities brokers and fund managers concerned, since falling revenues for petrochemical companies translate into future job losses, closures and ultimately rising oil prices. The flipside of the low oil price dilemma is that it may be reflective of decreased economic activity owing to lower overall production levels. Deflation is always hovering in the background, and steadily falling prices are of grave concern to policymakers.
The news has not been helped by reports of increased oil production out of the Middle East and high levels of US oil production. OPEC countries continue to flood the market with cheap oil in the hopes of flushing out the competition in the US. American oil companies announced plans to scale back their operations in Q4 of 2014, yet they continue to produce oil well beyond the existing demand level. Both WTI crude oil and Brent crude oil dropped below their key support levels in $50 per barrel and $55 per barrel respectively. Banc De Binary trading analysts have been seeing large numbers of put options on commodities in the energy sector. This bearish outlook will continue as long as an oversupply of oil pervades the global markets.
How Are Markets Reacting To Falling Oil Prices?
The markets typically react negatively to falling oil prices, and in this latest instance the DJIA plunged 321 points (1.82%) in early trading. The S&P 500 index dropped 37.72 points (1.83%). More importantly, volatility on Wall Street spiked by 15% for fear that the oil price would continue to fall. Traders exited the equity markets and ploughed their money into government bonds. As the prices of those bonds increased, the 10-year Treasury note yield dropped to 2.05%. Falling oil prices are reflective of general economic sentiment which is bearish. With Europe and Japan clearly in a recession, and deflationary fears a very real possibility, falling oil prices are par for the course. Traders across the US, the EU and Asia are deeply concerned about the upcoming January 25 parliamentary election in Greece. The euro has lost significant ground against the dollar, as a result of strong support for the Syriza party in Greece. If Greece happens to break from the euro currency zone, the European currency will suffer tremendously.
Deflationary Elements Surfacing in Markets
Analysts across the board have been making references to deflationary components in the global economy. The poor economic performance of European nations, falling oil prices, and general lack of momentum are cases in point. Typically, January is a bullish period for equities markets – especially commodities funds. However this is no longer the case since there is a net outflow of capital from the oil markets. Oil companies are starting to react to falling oil prices with news of cuts to investment spending, scaling back of operations, and retrenchments. Borrowing has increased heavily for many big oil companies as they try to stay afloat in tough economic times. US shale oil companies are finding it difficult to compete with Middle Eastern oil companies, owing to the higher costs of production and exploration in the US. The Automobile Association of America reported that the national price of gas dropped to $2.20 per gallon, with at least 13 states selling gas at under $2 per gallon. At consumer level, lower gas prices boosted retail shopping figures for the festive season. It has been estimated that the US economy is saving upwards of $450 million per day on lower gasoline prices.