U.S. stock investors are wary that a 30 percent slump in oil prices will pressure corporate profits while also presenting a sign of weakness in global growth at a time they are already weighing when the long economic expansion will end.
Crude prices rebounded off of one-year lows to start the week, with investors focused on Thursday’s meeting in Vienna of the Organization of the Petroleum Exporting Countries (OPEC) and allied producing countries including Russia. A monitoring committee of OPEC and its allies agreed on the need to cut oil output in 2019, two sources familiar with the discussions said.
Oil’s drop holds economic benefits, including lower costs for some companies and cheaper fuel prices for consumers. But investors were already bracing for a significant drop in U.S. profit growth next year, and the oil price slump is poised to bite into profits for energy producers and related companies that are part of Wall Street’s benchmark S&P 500 stock index .
OPEC and allied producers used output cuts to curb an oil glut that sent prices from late 2014 into a prolonged slump, bringing prices to below US$30 a barrel at the start of 2016. But supplies are growing again, and the U.S.-China trade war and other factors have investors worried that slowing economic growth could erase demand and send prices still lower.
“What started the sell-off on oil was a supply issue,” said Alicia Levine, chief market strategist at BNY Mellon Investment Management. “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.”
Crude oil prices have fallen 30 percent or more 13 times since 1982, according to Ed Clissold, chief U.S. strategist at Ned Davis Research. Of the prior 12 occurrences, the oil drop overlapped eight times with what Ned Davis Research defines as a cyclical bear market - a 30 percent drop in the Dow Jones Industrial Average after 50 calendar days or a 13 percent decline after 145 calendar days.
Channel NewsAsia
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