Are slumping oil prices a harbinger of doom for the stockmarket? Albert Edwards of Société Générale notes that weak commodities often serve as “a leading indicator” for other asset prices. Crashing oil demand suggests that the global economy is heading for a deep recession. Shares, another “cyclical risk asset” prone to recessionary plunges, could soon follow black gold south.
Oil prices remain historically depressed. However, they enjoyed a strong start to the week, with US West Texas Intermediate, which turned negative last month, doubling over a week to trade above $23 a barrel and Brent rising through $29 a barrel to hit a three-week high.
The easing of lockdowns in many places means that demand is slowly returning for the world’s favourite commodity, says David Hodari in The Wall Street Journal. Goldman Sachs analysts report that consumption is up by 2.5 million barrels per day since the nadir of early April. Yet things are far from normal. America’s oil storage problem, which caused April’s price crash, is still with us, says Caroline Bain of Capital Economics. We are not “out of the woods yet”.
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“There is nothing like low prices to cure low prices,” says Stephen Innes of AxiCorp. Global oil supply has been shrinking rapidly in the wake of last month’s market drama. US oil and gas companies have closed 384 platforms in the past seven weeks alone. There are “nascent signs” that the market is rebalancing.
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