David Fuller's view -
Another dive in the oil price: new fresh lows in global equity markets. That's been the dominant pattern for 2016, and it shows no sign of abating.
The trend continued last night, with tumbling crude oil prices dragging down global equity markets. The key US market – West Texas Intermediate – fell 7 per cent per cent, hitting its lowest level since 2003, while the global benchmark – Brent crude – fell 5 per cent to $US27.33 a barrel, a 12-year low.
Indeed, this pattern has become so entrenched that so far this year there's been around a 90 per cent correlation between movements in the key US share market index, the S&P 500 and changes in the oil price (a 100 per cent correlation means that the two move in perfect unison). Which is remarkable given that the US share market usually shrugs off moves in the oil price.
So the big question is why, all of a sudden, the two are now moving in virtual lock-step.
Most analyst agree that global equity markets started showing a hyper-sensitivity to the oil market when the price of crude first approached, and then fell through, the $US30 a barrel level.
Investors have started getting seriously worried that the lower the oil price goes – and the longer it stays down – the greater the threat that many debt-laden oil producers won't be able to meet the interest payments on their debts. As a result, we're likely to see a sharp spike in defaults, and even bankruptcies.
Already, with the oil price continuing to edge further below the $US30 a barrel mark, a high proportion of North American Energy companies are losing money. And with every move lower in the oil price, the likelihood of large-scale defaults and bankruptcies rises. What's more, it's only a matter of time before credit-rating agencies start the process of downgrading triple-B, and even A-rated Energy companies.
As a result, the problems in the oil market have been infecting the huge high-yield US debt market (commonly referred to as junk bonds) for some time., even though the Energy sector only accounts for a relatively low share – around 10 to 12 per cent – of high yield indices.
Given investors’ current mind set it is hard to imagine stock markets rallying against the background of new lows for crude oil prices. However, the lower Brent falls, the more sharply it is likely to rebound. Moreover, oil is already experiencing a severe bear market.
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