- By David FrancisDavid Francis was a senior reporter for Foreign Policy, where he covered international finance., Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
Global stocks dropped sharply Friday on growing fears that global growth, particularly in China, is slowing, and that historically low oil prices would only sink lower with Iran’s crude set to enter an already-oversaturated market. At least one of these concerns appears to be misplaced.
Wall Street sentiment soured on the impending arrival of so-called “implementation day” of the Iran nuclear deal, which could come as soon as this weekend. This, in theory, would unleash additional volumes of Iranian crude oil into the glutted market. In midday trading, price of a barrel was down more than 6 percent, to $29.30. In London, Brent Crude was down 6.5 percent, trading at $29.03.
In reality, while the gradual easing of sanctions will make it easier for Iran to export more oil than it has in the past three years, it won’t open the floodgates anytime soon. Oil market experts figure the country can ramp up exports only by a few hundred thousand barrels a day during the first half of 2016. According to OPEC, Tehran produced about 1.1 million barrels per day in 2015. Iranian officials, more optimistically, say they can nearly double Iranian oil exports and add an additional 1 million barrels to the market by next year.
More important for the near-term outlook for oil prices is the balance between supply and demand. Big producers like Saudi Arabia and Russia continue to produce flat out, even though prices are at 12-year lows; Saudi Arabia puts more than 10 million barrels of oil up for sale each day, while Russia produces roughly the same amount. Demand for oil is not growing as fast as last year, and economic headwinds in Asia could dampen that even further.
And low prices are already knocking out some oil producers. U.S. shale companies are bleeding red ink, and are throttling back output in places like Texas and North Dakota. Many experts expect non-OPEC production to shrink by about 600,000 to 700,000 barrels a day this year — the first such contraction since 2008 — which will help build a floor for oil prices.
The bloodletting in oil prices was more than enough to spook markets. At one point early Friday afternoon, the Dow Jones Industrial Average in New York was down more than 500 points, or more than 3 percent, while the S&P 500 dropped by nearly 3 percent. The Dow eventually closed down 391 points.
Adding to concerns about oil are continuing signs of weakness in China, the world’s second largest economy. There, the Shanghai Composite plunged another 3.6 percent on Friday, 21 percent below its December high.
Friday’s losses continue a brutal start to 2016 for equities. On December 31, 2015, the Dow closed at 17,425. As of 2:10 p.m. New York time Friday, it was trading at 15,968. It’s on pace for its lowest close since August.
The drop was so dramatic that the White House, which doesn’t normally comment on daily market moves, weighed in. “Obviously these are market movements that are closely watched at the Treasury Department,” White House spokesman Josh Earnest told reporters Friday.
Whether the shaky start to the New Year portends broader weakness remains to be seen. The World Bank expects the U.S. GDP to grow 2.8 percent in 2016, and the 5 percent unemployment rate is the lowest it’s been since 2007.
“I’m not selling. I’m holding on because I do believe this is a growth scare and not a bear market,” widely followed hedge fund manager Leon Cooperman, CEO of Omega Advisors, said on CNBC Friday afternoon.
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