Oil price plunge shakes markets

published 8 January 2015

Oil slumped again early this week, losing 10% in two days and falling below $50 a barrel for the first time since May 2009. The oil price plunge means prices are down by almost 60% since they hit $115 in June.

The slide, along with turmoil in Greece, shook stocks, with a 2% drop in the FTSE 100 marking its worst first Monday of the year on record. Continental stocks did even worse.

What the commentators said

There is a growing focus on demand, as David Jolly noted in The International New York Times. Investors are coming to see the plunge in oil prices as "a bad omen" for the global economy.

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It can't have helped that a widely watched survey of global economic activity compiled by JPMorgan has slid to its lowest level in a year. Still, while global activity may have weakened of late, investors are being too pessimistic, reckoned Capital Economics.

They're forgetting the potential boost to the world economy from lower oil prices themselves. A $10 fall in the price of oil tends to boost global demand for goods and services by 0.2%-0.3%.

However, markets are also worrying that cheaper oil may cause nasty surprises for the financial system. The focus is on the junk-bond market, where the desperate search for yield and low interest rates helped create a shale bubble.

Many of the companies drilling for oil hoovered up big piles of easy money to do so. Debt issued by energy companies comprises 15% of the US Barclays High Yield Index, up from 5% a decade ago.

"It's hard," say Ivan Rudolph-Shabinsky and Petter Stensland of Alliance Bernstein, "to find a historical example of so much money chasing an opportunity that ended well." In short, said Larry Elliott and Angela Monaghan in The Observer, "shale could be the next sub-prime".

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.