As energy rates continue tumbling down, oil price forecasters are looking for something—anything—to provide some shred of hope for a recovery.
But crude oil no longer found itself alone as it declined this week. Global exchanges began crashing, prompting massive sell-offs and threatening economic collapse.
Leading the charge was the increasing brittleness of China’s economy, which is looking ever more unstable since its stock market began nosediving in June. The Shanghai Composite Index fell by 8.5% in Monday’s financial carnage, sparking sell-offs across the whole world.
Both Brent crude and West Texas Intermediate (WTI) took a solid beating on Monday, crashing by six and five percent respectively. WTI has temporarily stabilized between $38.00 and $39.00 per barrel, while Brent seems determined to flirt with the $40.00 mark. Though both oil blends rallied somewhat in Tuesday trading, they are both now firmly in territory unknown since 2009.
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What hope can be scraped together for oil bulls, then? Overproduction on a record scale continues unabated, with Saudi Arabia’s prediction that U.S. producers would be squeezed into capitulation a clear error in judgment. Iraq continues to defy the odds by pumping ever-increasing levels of oil while the threat of Iran’s return to energy markets causes no end of sleepless nights for oil executives.
Tuesday and Wednesday’s mini oil-rally isn’t likely to continue, or even stop stem the tide from reversing back into the negatives. Emerging market economies, up until now some of the strongest centers of global growth, are looking increasingly frailer by the day and undermining investor confidence. China above all has been unable to get a handle on its stock market collapse, as Beijing has employed both direct intervention tactics and more market-oriented fiscal stimulus measures. Indeed, despite the People’s Bank of China raising interest rates, the Shanghai Composite Index fell by an additional 7.63% on Tuesday.
But could this contagion spread to U.S. markets?
It’s difficult to tell, as market volatility has surprised everyone this year, but the American economy appears to stand on more solid footing than China’s. But this doesn’t negate the possibility of economic collapse, as several large U.S. banks saw their share price crash on Monday. JPMorgan, for example, declined by 20% before recovering, and five to 10% losses were common across the board.
What does this have to do with oil, you ask?
Current global markets are creating more downward price pressure on oil at a time when the black gold faces its worst fundamentals imbalance in years. Despite hitting multi-year lows, the oil price outlook is still decisively bearish for the time being.
The only hope left is the U.S. Federal Reserve.
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While the Fed had been hinting at an interest rate hike for some time, expectations had risen in July that it would happen in September. The problem for energy markets is that U.S. interest rate hikes raise the value of the dollar, and as crude oil is denominated in U.S. dollars, it essentially makes oil more expensive for everyone. A Fed hike would thus have a profoundly negative effect on demand for oil, which is already limping along and unable to catch up to supply.
Even the possibility of a rate hike had been hanging over the price of crude like a bearish cloud.
But now that global market volatility has called a possible rate hike seriously into question. And the Fed may yet reconsider. Investors are already hedging their bets, with many analysts banking on it not happening.
Some would call this hope small consolation for an oil market battered by a 60% year-to-date devaluation and the worst downward price trend pattern since 1986. But it remains one of the only points of optimism as we face a possible stock market collapse.