The price of oil continues to fall. After a slump of nearly 7% in one day late last month, caused by Opec’s decision not to cut production in the face of increased supply, Brent Crude now stands even lower at around $56 a barrel, a 5 year low.
As The Economist pointed out recently, if the stock market had dropped by a similar amount we’d be talking about a crash.
The effect has been a drop in currencies linked to oil and concerns that prices are now way below the break-even price for many governments of oil producing nations, raising the spectre of political and economic unrest in those countries. The price drop may also be an indication of a slowing global economy as demand has also softened.
On the positive side, a low oil price is historically matched by higher returns from equities. It also acts as a tax cut for western consumers filling up their cars, hence a feel good factor for many. The associated deflationary pressure could make central banks intervene, which would also be positive for equity markets. Opec’s next step will be interesting to watch.