Where the oil prices goes, stock markets follow. The slightest hintof an uptick in demand, a dip in inventory levels or an outputfreeze,and crudesurges and takesshare prices with it.When oil soared12% last Friday on hopes of an Opec production cut, the FTSE 100 duly bounced3% to end a dismal week on a relative high.
Fun and friendship
So what to make of this mornings news that Saudi Arabia and Russia have agreed to freeze output? Markets are behaving like a spoilt child who expected a bigger birthday present. Over-eager traders convinced themselves that a cut in production was in reach, something that was never going to happen at this point. The oil price is falling accordingly, and share pricesare also retreating.
We live in strange times, when pricieroil is seen as good for the stock market andglobal economy. Cheap crude has traditionallybeen seen as a positive, because it puts money into Western consumers pockets andcuts business costs, but not any longer.
The crashhas left producer nations nursingballooning deficitsand forced the likes of Nigeria and Angola to run cap-in-hand tothe World Bank. Another concern is that stricken US shale companies could trigger a mass bond default that would shake debtmarkets. Falling demand is also seen as yet anothersign that the global economy is running out of steam.
Cheap crudehas also been bad news for investors, slashing the share prices of top producers such as BP and Royal Dutch Shell, which are down 27% and 31% over the last year, and explorers such as Premier Oil and Tullow Oil, down 56% and 80%, respectively.
Despite todays deal, oil could still fall further. Markets are oversupplied by a million barrels a day and Iran is set to add another million barrels to that.Saudistill wantsto sinkthe US shale industry and everybody is keento hang on to market share. Russia knows that slowing the flow of oilwill damage its ageing infrastructure and may also require extensive new storage tanks.
Burn baby burn
That said, the kindling for an oil price blaze is graduallybeing laid. Higher-cost Opec members Venezuela, Mexico, Algeria and Nigeria are postponing projects, investment is down across the board, and shale producers areshaken. Cheaper oil should also fueldemand for gasoline, all of whichsuggests that crude will catch fire at some point. TheSaudi-Russia freeze, if it holds, could pave the way for a future cut.
Phil Flynn, senior energy analyst at The PRICE Futures Group, recently notedthat the last time oil sufferedback-to-back losing years, in 1997 and 1998, prices more than doubled the following year. If history does repeat itself, oil company stocks and markets will blaze back into life.
And when that happens your portfolio should catch fire as well, assumingyoutook advantage of low oil and share prices to load up on cheap stocks today.
If you’re looking for an exciting growth prospect that could really turn up the heatwhen markets start tofire up, we have one for you right here.
This mid-cap company has been putting on the style lately and one of the Motley Fool’s top analysts reckons it’s the latest British brand with the potential to go global.
To find out its name all you need do is download our BRAND NEW report A Top Growth Share From The Motley Fool.
Click here to read this no obligation report. It will be yours in moments and won’t cost you a single penny.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B and Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.