Oil has been the link to everything in the last decades. It ignited more conflicts and worldwide economic disparities than one can imagine. By the end of 2016, oil prices fluctuations and their impact of the oil stock price had investors worried. At the same time, analysts noticed that there was a very strong relationship between the commodity and the emerging market currencies.
A low oil stock price is beneficial to importing emerging markets, such as Indonesia, Brazil, India or China and it proved to be detrimental to large oil exporters such as Russia. Such low prices have been recently registered and it became clear that the oil market descended to a bear market which impacted energy producers, the import-export exchanges, investors, transporters and so on.
By definition, a bear market is a trend or a market condition sustained by a significant securities price fall. It entails an overall feeling of pessimism leading in turn to the stock market’s downward spiral to be self-sustaining while investors anticipate losses. Given the fact that in the summer of 2016 the oil stock price in Russia and the oil-exporting Gulf region registered losses (with oil sold for less than $40 a barrel in New York), the entire world was shaken by a wave of uncertainty.
First we should factor in the surprising results of the U.S. presidential election, the U.K. Brexit, Russia’s struggle with the E.U. restrictions imposed back in 2014, and the instability of emerging markets’ currencies in the post-Trump election months. Doing so, we might think the oil stock market fluctuations can actually break the world apart. In the great puzzle of oil interests and trades, the emerging markets seem to have a lot to suffer.
How Does the Oil Stock Price and Market Look Today?
From an investing point of view, the steady prices oil enjoys today determined players to get back in the game. The U.S. and the global energy companies shook off the pessimistic feelings of the last months. But, as usual, things are not as easy as they seem. According to financial analysts and oil stock market specialists, we are in for trouble. Investments are on the low side. The executive director of the International Energy Agency warned that sharp spikes in the oil prices would be possible from 2020. That is, if new investments do not increase and keep up.
This rather pessimistic view is corroborated by OPEC. It deems the last three years of low investments in the oil stock market as unprecedented. Saudi Arabia pledged to continue investing at high rates in oil projects. They emphasized on the fact that this lag in long-cycle investments might lead to global concerns very soon.
In other words, low investments in oil projects can lead to an imbalanced need-demand relationship. As we know, low investments mean low supply. This volatile and precarious supply-demand correlation usually impacts importers. The lower the supply, the higher the demand, and the bigger the prices. It’s a slippery slope leading to difficulties for emerging countries sustaining their economic growth.
Making and Breaking Emerging Markets
As of late (with the oil stock price getting a much welcome rebound), Russia got some economic relaxation. While it saw some growth (in part due to the belief that the Trump administration would offer some relief), Russia’s odds are not that optimistic. Trump’s financial and foreign policy intentions may shake Russia’s temporary growth. Furthermore, the modest recovery in the oil price might be overturned by future U.S. policies.
On the other side of the world, the slight rebound in foil prices put a lot of pressure on India. As we know, it’s one of the most powerful emerging markets in the world. It’s also one of the largest importers of oil in the world. The low prices drove down India’s value of imports, helping it narrow its current account deficit.
The oil stock price is intimately linked to the stock market of other commodities. Thus, currencies of all economies, emerging or developed, fluctuate together with oil prices. Emerging markets are especially vulnerable to oil stock price movements even if they are exporters like Russia or importers like China and Brazil.
When oil moves, other important commodities move as well. That stems from costs related to transportation, energy, the fuel needed for production, and so on. Agricultural commodities (soybeans, corn, and wheat) and industrial ones (iron ore, aluminum, and copper) are all highly sensitive to oil stock price movements. Brazil, Russia, India, China and South-Africa (the BRICS countries), together with Central and South-Eastern Europe see the worst effects of oil moving on the stock market.
The Magic Number 50
According to analysists, the fair and healthy oil stock price is $50 a barrel for crude oil. Such an oil magic number might balance the supply and the demand ratio. Thus, it would help emerging markets to pursue their goals of development. They would not, in turn, shake the economy of the large oil providers. Oil, at its best, should stay in its fifties for a couple of years to allow for steady growth among all economies.
According to the more optimistic views on 2017, specialists predict a moderate 3% of global economic growth. A belief also sustained by the stability of the oil stock price. But we are not out of the woods yet. There are plenty of uncertainties to still deal with, including the current U.S. presidential views on foreign policy, immigration, free trade and tariffs, the conflicts emerging in South-East Asia, Brexit and the future relationship between U.K and the European Union, Russia’s poor business infrastructure, a possible dissolution of the European Union and the ongoing conflicts in the Middle East.
In this global turmoil, emerging markets are the most vulnerable when it comes to oil. Agricultural and industrial commodities are subsequent to oil moves, fluctuating currencies, and an evident lack of trust from investors’ part. We shouldn’t forget that just as oil impacts emerging markets, so do these emerging markets impact their neighbors. For instance, oil-centric currencies in Chile and Argentina were strongly affected by the volatility in Brazil. In the same logic, the currencies of Armenia, Georgia, or Kazakhstan can be severely impacted by the Russian ruble and the challenging landscape of the Eurozone mixed with the current strengthening of the U.S. dollar.
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