OPEC decision to start a price war in oil is having far reaching consequences across the global economy. The collapse in the price of oil could cause a wave of defaults and an environment where people are going to be less willing to lend money not just in the energy sector but across the economic spectrum. Not only are there growing supply side worries, it is coupled with signs of weakening demand. China's official purchasing managers' index (PMI) dipped to 50.3 in November falling from October's 50.8, missing expectations and lowering oil demand expectations. The Euro zone manufacturing guage was even weaker, coming in at just 50.1, barely eking out expansion. On top of that you have Moody’s downgrading Japan and the Swiss rejecting its referendum on holding more of their reserves in gold -- the makings of a commodity market meltdown. Oil has already had its biggest drop since 2008, and unless we find some stability in commodity prices soon things could get very ugly.
Instead of a price shock, the markets are sell shocked looking to oil in hopes that it soon finds some semblance of a bottom that can at least give other markets confidence that the move in oil is not indicative of another global financial meltdown.
While the International Energy Agency says that shale producers would be able to withstand a price drop to $42 a barrel, many producers that are highly leveraged cannot. Until oil stabilizes loans from banks will also be harder to get. Venezuela was having problems keeping a lid on unrest when oil traded above $90. Russia is seeing the ruble turn to rubble as sanctions and plunging oil prices raise fears that Russia’s economy will fall apart. Iran may also feel the heat as sanctions on their oil have already stretched them thin and the lack of progress on a nuclear deal will force them to sell oil at a larger discount.
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Moody’s added to the dour mood as it downgraded Japan’s government debt rating to A1 from Aa3. The reason is that while Japan has no problem with stimulating the economy it is having trouble balancing that with government revenue. Moody’s said that Prime Minister Shinzo Abe’s decision to postpone another sales tax increase by 18 months “poses risks to fiscal consolidation and, over the longer term, to debt affordability and sustainability.” Not to mention their ability to buy more oil.
With all the bad news we need to see oil stabilize. A free falling market is not good for anyone. Oil will try to defend the overnight lows near $62 but if they fail look for the stock market to take another hit and bonds to pop on safe haven buying.
The sell-off in oil also impacted natural gas. Cold temperatures passing and a warmup in store added to the pressure yet the spillover effect from oil was obvious.
Gold and silver are not faring well as deflationary pressures seem to be building. Some false hope that Switzerland would approve referendum requiring the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($540 billion) balance sheet in gold were dashed giving traders reasons to sell. Economic weakness in China is another reason gold bugs are being squashed.
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