- Oil prices tumbled as much as 34% – the most in decades – between Sunday and Monday before settling at around $US34, down close to 20%.
- President Trump tweeted Monday: “Good for the consumer, gasoline prices coming down!”
- While oil prices falling are often good news for the global economy, Morgan Stanley said that this drop “is a net negative for the global economy.”
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Oil prices are tumbling, sending stocks with them.
One follow-up question on the minds of many on Monday is whether that oil price drop is a good thing for the economy, or a bad thing.
President Trump tweeted Monday that the oil price decline was good for the consumer, as gasoline prices were coming down. That means more money left over in the pockets of drivers. The same holds for businesses that have oil or oil-related products as one of their primary costs.
And while it’s often true that falling oil prices are good for the global economy, this time might be different, according to Morgan Stanley.
In a note sent prior to Trump’s tweet, the Wall Street bank said that “we are viewing this as a net negative for the global economy.”
“Our perspective on the movement of oil prices is that the backdrop matters,” the note added.
The falling oil price is bad news for US shale producers: The lower price of oil makes it uneconomic for these producers to extract oil, whereas the breakeven price for Saudi Arabia and Russia is much lower. In a separate note, Societe Generale said: “Prices have adjusted downwards to significantly below the average wellhead breakeven level of US shale, which is roughly $US40/bbl. US shale production should fall significantly this year rather than grow.”
The oil price decline arrives amid slowing economy growth: From Morgan Stanley’s note:
- There is weak global growth at the starting point.
- Global growth is likely to dip further due to the impact from the coronavirus.
- Global financial markets’ volatility has led to a tightening of financial conditions, which will likely amplify the negative implications from the sharp fall in oil prices.
The oil price drop will also see borrowing get harder:The bank’s analysts predict that the decline in oil prices will reduce capital expenditure for oil-related sectors and countries, and that credit markets will also react negatively, leading to a “tightening of financial conditions.” In other words, it’s going to be harder for oil and oil-related companies to finance themselves.
The coronavirus makes this situation different:Lastly, Morgan Stanley argued that “while lower oil prices will translate to lower retail prices, this positive benefit will not be fully realised as the lower oil burden on consumers will likely not fully translate into higher spending in the near term as it is occurring against a backdrop of overall downdraft in the economy and financial market volatility.”
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