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What's going on?
The International Energy Agency (IEA) had bad news for the oil market on Tuesday: in contrast to its previous view, it thinks the supply of oil will continue to outstrip demand, at least into next year. Oil fell about 2% after the report was released.
What does this mean?
Production from Middle Eastern countries, like Saudi Arabia, has been increasing since 2014 when the members of OPEC, a collection of oil-producing countries, chose to rescind a limit on the amount of oil they produce. Production from Saudi Arabia and others are now at record levels.
As the price of oil fell over the past few years, buyers (especially in Asia) have bought a lot of oil for their long-term strategic reserves. They were, effectively, taking advantage of the low price. However, it seems that demand from those countries is now, in the IEAs words, wobbling. It could be that their strategic reserves are filling up and that everyday use isnt strong enough to maintain current demand (if true, that would be a negative for the oil price).
Why should I care?
For the market: All eyes are on a big OPEC meeting later this month.
There has been speculation that OPEC countries will agree with Russia not to increase the amount of oil they produce. This could provide support for the oil price by limiting supply growth. However, many market participants think that such a deal will not be agreed and effectively implemented (e.g. there will be cheating). If its not, the impact on the oil price is likely to be negative.
For stocks: The oil price matters to stocks.
Energy companies make up a significant proportion of stocks globally, and banks have lent a lot of money to such companies. For these and other reasons, there has generally been quite a tight relationship between the oil price and stocks this year, e.g. when oil goes down significantly, stocks often follow.
Originally posted as part of the Finimize daily email.
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