Oil prices continue its downward spiral following OPEC decision to maintain production at the current level. Year to date, it has dropped more than 35% from its peak at $110/barrel to its current of $68/barrel.
As a result, this has send O&G stocks going spiral downwards and bloodbaths across the market. If you must buy an O&G stocks during this period of uncertainty, at least choose those companies with strong balance sheet and track records in going through the uncertainty.
Oil is a volatile commodity and over the years it has seen its ups and downs over the various economic cycle. The data below shows the historical biggest oil movements since 1876 till today.
What is interesting about the data was that there was mostly negative correlation between oil prices and equity performance. Equity was mostly up during the drop in oil prices, except for the 3 occasions in red. It is not surprising to see that lower oil prices drives consumption as a result of lower energy and gas prices, hence boosting economic activity and reducing inflationary pressures.
The 3 exceptions in red was due to the forces of global recessions, which impacted across all sectors from consumers to banks, and this is the very same reason why we need to look at the impact of the drop in oil prices. For now, it appears that the situation is contained. However, further inaction from the OPEC may send its prices further downward and caused a spiral wave of catastrophic event which may impact the high yield market, banks and then consumers.
Then it will be interesting.
