Quite a few people are talking about falling energy prices but most fail to mention that crude oil and gasoline are in a bear market. For the past few months, global energy prices (mainly, crude oil and gasoline) have imploded, and have each entered their own secular bear markets. The most common definition of a bear market occurs when a stock (or market) falls at least 20% below a recent high. Crude oil and gasoline prices have plunged nearly -40% since the summer (which is a huge move) and prices continue to fall.
Weakness Begets Weakness
Remember markets trend, which means they move up, down, or sideways for sustained periods of time. Right now, energy prices are in a clear downtrend (a.k.a. bear market) which means the path of least resistance remains lower until further notice.
Economics 101: Supply & Demand
Economics 101 teaches us that price is a function of supply and demand. All things equal, prices tend to rise if supply falls or demand rises. Conversely, prices fall when supply rises and demand falls.
The Perfect (Bearish) Storm
Why are energy prices imploding? A 40% decline in a few months is not an insignificant sum. For months, we are seeing energy prices take a one-two punch: supply is growing while demand is waning. The U.S. shale market is exploding which has brought (and is bringing) a lot of new energy to the market (supply increases). At the time same, the global economy remains lackluster at best (demand is waning) which is the primary reason why energy prices are imploding.
Lower Energy Prices Are Good- For Now
Keep in mind that energy prices serve as an indirect tax on both consumers and businesses. That’s why when energy prices fall (at a moderate pace) it serves as a net “positive” for the economy because it gives consumers and businesses more money to spend (more disposable income). Of course, if energy prices continue to implode, or fall at a faster pace, then one could be concerned about “demand destruction” and that could bode poorly for the global economy. But we are still very far from that point.
Healthy Holiday Season
As we make our way through this holiday shopping season- suffice it to say that low energy prices should be positive for the U.S. and Global Economy.