George Gammon: Why Is The World’s Most Important Market Crashing?
Energy is the key to the economy. And in the energy market, oil remains the key player. This energy is critical for transportation. But it’s also useful for power generation and industrial production. Despite being a heavily-watched commodity, its moves can sometimes take the market by surprise.
Right now, this commodity is crashing. Just weeks after oil cartel OPEC announced production cuts, which should have led to rising prices, oil has dropped nearly 20 percent in less than a month.
What causes such a move?
A weaker economy is the likely culprit. Oil prices collapsed in 2020 amid the pandemic, as stay-at-home orders kept millions of drivers off of roads and factories closed. That even led to some oil contracts briefly trading at a negative price.
Another factor weighing on oil prices is backwardation. That’s a term for when longer-dated oil prices are lower than current prices. That’s another sign that traders expect the economy to be weaker in the future. If that’s true, oil prices will be lower too.
As with the U.S. Treasury curve, it’s normal in an expanding economy to see prices move higher over time. It’s when things are negative looking to the future that there’s a potential danger ahead.
Given the weakness in the oil market amid lower future supply, it’s likely this market is also hinting at a weak economy and poor stock market performance ahead.