The stock market has seen sharp falls of around 30% in the price of crude oil, and investors are expecting corresponding hits to corporate profits.
The stock market has seen sharp falls of around 30% in the price of crude oil, and investors are expecting corresponding hits to corporate profits. Anything that affects the price of crude oil has serious knock-on effects for the wider global economy.
For CFD traders, this situation has many implications. Price fluctuations are the basis of successful CFD trading, so the fact that the oil market is volatile can be good news. However, too much unpredictability can lead to a situation where taking a position can become too risky in a certain sector.
With oil so influenced beyond its own niche markets, the chances of other investment areas seeing effects are high.
What is happening with oil?
Crude oil prices, measured on a “per barrel” basis, recently hit one-year lows. The main factors that led to this are a general glut of supply and worries about weakening future demand.
This week’s meeting of the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna will reveal the group’s reaction to the current situation, with many believing that there will be a cut in production. An OPEC monitoring committee agreed on the need to cut oil output, according to sources.
Any drop in the price of oil brings about lower costs for companies and cheaper fuel for consumers. OPEC and its allies have cut back production before, notably to halt a prolonged slump beginning in 2014 that saw per barrel prices fall below $30 at the start of 2016.
According to Ed Clissold, Chief US Strategist at Ned Davis Research, crude oil prices have fallen 30% or more on 13 occasions since 1982. On eight of these occasions, the drop overlapped with what Clissold’s company defines as a “cyclical bear market.” In spite of this, Clissold said that the oil price decrease only overlapped with a US economic recession three times.
This year’s falls
Alicia Levine, Chief Market Strategist at BNY Mellon Investment Management, explained the main reasons for this year’s oil price falls: “What started the sell-off on oil was a supply issue,” she said.
“In the last couple of weeks, what we are getting is fears of slowing demand. And fears of slowing demand are directly related to fears of global growth slowdown,” Levine added.
Oil’s decline is not the only turbulent aspect of the current stock markets, but along with trade wars, central bank rate hikes and worries about company profits, it is one of four major concerns.
Regarding the price per barrel that would be good for the markets, Keith Lerner, Chief Market Strategist at SunTrust Advisory Services in Atlanta, said: “Somewhere in the $50-60 level, it’s probably a good level for the market, because producers are making enough money, and it’s also helping the consumer.
“But if you see an abrupt move down, the bigger concern is what is that signalling about the global economy,” he added.
However, some investors think that low oil prices have positive aspects, including a stimulus in consumer spending due to lower gasoline prices, which at the same time help keep inflation in check and potentially prevent interest rate hikes.
For CFD traders, these issues are usually more about changing asset prices rather than concerns about wider economic fallout. With oil as the underlying asset, however, the situation is different, as it has such a far-reaching effect that can impact on other CFD investment areas.
David Bianco, America’s Chief Investment Officer for DWS, has estimated that a drop in oil of $5 per barrel takes $1 to $1.50 per share from S&P 500 earnings. This impact does not only affect oil producers and energy sector companies but also hits manufacturing. Of course, consumer companies and businesses that rely heavily on fuel, including airlines, can see significant boosts.
In terms that a CFD trader might well understand, Bianco said: “The S&P is much more of a commodity producer than a commodity user.”
Oil importance for CFDs
“Higher commodity prices bring higher profits, and lower commodity prices bring lower profits…This is one of the most reliable relationships when it comes to corporate profitability of them all,” Bianco explained.
Therein lies the true reason why the movements of oil prices on the world markets are a very important issue for CFD traders, especially those who use news sources as a prime trading strategy tool. With OPEC’s decision in Vienna this week likely to set the tone for oil production in 2019, the signs will be there for all to read.
What makes these circumstances really interesting is the newly self-sufficient nature of US domestic oil production and the ways in which this will affect the global market. It is not yet known if US President Donald Trump will start another trade war that revolves around oil.