The US Dollar strengthened as a result, which might also provide additional arguments to Fed doves who want to keep the rates steady. This could further affect the glut in the oil markets, as oil companies with a weak financial position will be able to rely on lower rates for longer to borrow themselves out of a hole. The implications of this could be more drilling that will contribute to the glut because cheap money rules the markets.
Nevertheless, stocks didn’t have enough fuel in their tanks to keep their Monday recovery going, once news about a worsening oil glut came out. But the sudden dip could also be due to a knee jerk reaction. In general terms, cheaper energy should produce a windfall for many industries, but it seems that investors are looking past the oil glut and instead are reading more into the lack of demand from China as a driving force for lower oil prices. To many investors the oil glut is a symptom of a wider malaise called global economic slowdown.
As such, any market recoveries could be fragile and short lived, albeit more common than many would think. Cheap money is still flying around and it will eventually find its way back into the markets, pumping stock prices back up again. The only pattern that will manifest itself consistently in the near future, is one in which there are short runs in the market with a lot of volatility involved.
As such, investors must take into account that the health of the oil industry is not the only thing at stake. The oil glut should be treated of an indicator that could send major components of the world economy into a dangerous spiral. With less income from oil, economies that are dependent on black gold will demand less products from China, which will reinforce the oil glut as these countries strive to protect market share. This could give the ‘lower for longer’ interest rate policies the tail wind needed to keep on fueling bubbles all around.
