Will Collapse in Oil Price Cause a Stock Market Crash?
By TOM THERRAMUS AND STEVE AUSTIN
OIL-PRICE.NET
2015/01/14
The Black Monday stock market crash of October 19th, 1987 was the largest one-day percentage decline in the Dow Jones Industrial Average. The crash was a genuinely perplexing event. To informed observers it seemed to have little basis in economic fundamentals. There were various “hand-waving” theories, including that the introduction of automated trading on the Dow had injected instability into the market. However, at the time, Black Monday appeared to come out of nowhere.
Perspective
In an analysis published in 2009, Therramus pointed out that Black Monday fell into a broader pattern in which nearly every stock market crash and recession of the preceding 50 years had occurred shortly after a large and abrupt change in the price of oil. In the case of the 1987 Dow crash, it was foreshadowed by a tumble in oil price that ensued in the wake of disputes within OPEC – which had come to a head in the previous year.
During the mid-1980s Saudi Arabia grew increasingly frustrated with cheating on agreed oil production quotas by other members of OPEC. In 1986 the Saudis gave up honoring their own quota commitments to the cartel and the price of oil plummeted.
Current Falls
Between July 2014 and January 2015 the price of oil plunged over 55%. One of the steepest legs of this decline was a 10% drop that occurred on Black Friday November the 28th following a meeting of OPEC. The ostensible reason for this fall was that the Saudis had refused to agree to production decreases being pushed by some OPEC members, instead choosing to let the market play out for the time being.
Analysis
Given this article’s brash headline and its tenor so far you might be led to believe that we foresee a large fall in stock prices in the next year or the year after. Perhaps the 2014 Black Friday plummet in oil prices could spark a Black Monday-like stock market crash in 2015?
This is the 4th in a series of related articles written for Oil-Price.net (2009, 2011 and 2013). The last of these written in late 2013 had the prescient title “Oil Price Volatility on the Way”. In this series, the theory is developed that since the year 2000 we have seen the emergence of an oscillatory pattern in oil price volatility. Moreover, it has been suggested that the mechanism driving this oscillation is a teetering imbalance between oil supply and demand that was set in motion when global production reached a plateau in the mid-2000s.
The Rest…HERE
