Why Are Oil Prices Collapsing?

Global Economy Just Getting WeakerOil plays a critical role in economic growth as oil is used in a variety of industries. In times of economic growth, oil prices rise. When the economy is soft, or getting soft, oil prices fall as demand for oil wanes.

Over the past two months, oil prices have collapsed for the simple reason that the global economy is getting weak.

The chart below shows the steep sell-off in oil prices that started in mid-June.

Light Crude Oil-Spot Price ChartChart courtesy of www.StockCharts.com

What’s interesting to note is that oil prices are falling at a time when we have numerous troubling events in the Middle East and Russia. In normal circumstances, these developments would have caused oil prices to soar.

One more chart I want to show you today (which continues to spell trouble ahead for the global economy) is the Baltic Dry Index (BDI). Since the beginning of the year, this indicator of global economic activity has been collapsing.

Baltic Dry Index ChartChart courtesy of www.StockCharts.com

Since January, the BDI has fallen 45%. The BDI is an indicator of trade in the global economy; the less trade in the world, the weaker the global economy.

Over the past few months, the chances of the global economy witnessing an economic slowdown have risen significantly.

As I have been writing, the eurozone is in very deep economic trouble again. Japan, the third-biggest hub in the global economy, is begging for growth. And the manufacturing and real estate sectors in the Chinese economy are slowing at a staggering rate.

The continued growth of the global economy is critical for the U.S. economy. In 2012, 46.6% of the S&P 500 companies had sales from outside of the U.S. economy. (Source: S&P Dow Jones Indices, August 2013.)

How the stock market will continue to rise when half of the S&P 500 companies are getting their revenue from a global economy that weakens each passing day is a mystery—that is unless the stock market advance is a fake, a bear trap, as I have been warning.