It appears the ongoing decline in global oil prices has become the default answer to any downward movement in the S&P 500 and Dow Jones Industrial Average. Besides the fact that these indices include some oil stocks, their recent bad performance also flows from investors’ reading of global oil’s implosion. They infer that the downward trend in oil prices is due to a weakening global economy. This is too much of a stretch. It really is.
The complicated nature of the global oil pricing beast
As I have mentioned here before, the price of oil is primarily fictional. It is driven by speculation. Speculation kept it higher than it needed to be and now speculation is keeping it lower than it needs to be. Also, oil pricing is partly political. It is impacted by the internal positioning and agendas at OPEC. You only need to look at Saudi Arabia’s laser focus on preserving market share and you can see why OPEC’s oil pumps keep black gold flowing despite the cries of its other members-primarily Iran and Venezuela. Given all this, is it really all that wise to blame the recent Wall Street gyrations on oil’s continuing downward trajectory?
Oil pricing obviously seems exaggerated. If traders are going to infer global economic performance from oil’s pricing, this might lead to a distorted picture of the global economy six to twelve months down the road. This is far from the case. The US recovery is finally firming up and is now being felt on Main Street not just Wall Street. US recovery might spread to the rest of the world as long as financial markets don’t read too much into the price of oil. Indeed, very low oil prices might spur more consumption in Europe and this can forestall or even reverse the economic slump there. Anything can happen. One thing’s for sure though: using oil prices as a gauge for overall global economic health has its limits.