Stock Market Chaos Sparks Oil Selloff
The plunge in global equities on Wednesday and Thursday dragged down crude oil, with even concerns about falling Iranian supply not enough to keep crude from a steep selloff.
Brent fell more than 1.2 percent on Wednesday and was down another 1.5 percent in early trading on Thursday, falling back to the low-$80s per barrel, down from over $86 last week.
The same supply concerns are still there – Iran’s oil exports are dwindling, and it is unclear if OPEC can fill the gap. But the sudden cracks in the global economy took on a higher priority.
The conditions for an equity selloff have been building for quite some time. On October 9, the International Monetary Fund cut its forecast for global growth to 3.7 percent for 2018 and 2019, down from a previous estimate of 3.9 percent. The Fund said that “growth has proven to be less balanced than hoped,” and that the “likelihood of further negative shocks to our growth forecast has risen.” Also, the ongoing trade war between the U.S. and China, combined with the strength of the dollar and the turmoil and emerging markets could also lead to an economic slowdown.
China’s economy is already showing some signs of strain, and China’s central bank just slashed the amount of cash that banks have to hold in reserve, the so-called reserve ratio, by one percentage point. The move is seen is an attempt to keep growth aloft amid worrying signs of trouble.
In the U.S., the Federal Reserve has been going in the opposite direction, tightening interest rates in an effort to avoid inflation.
These various red flags for the global economy have been known for a while and are the background context for the sudden and painful selloff in global equities that began mid-week.
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