HomeA Chart to Remember

A Chart to Remember

19 October 2020 By Mircea Vasiu

Today starts the OPEC-JMMC Meeting, and it is as good an opportunity as any other to remember the price of oil dropping below zero. It remains the theme of the year, a historical moment that illustrates the complexity of financial market instruments as well as the importance of oil.

The OPEC-JMMC Meeting is closely monitored by energy traders and currency traders too. At the meeting, participate not only the OPEC members (i.e., thirteen countries), but also other oil rich nations (eleven other countries). The JMMC acronym stands for the Joint Ministerial Monitoring Committee, and the decisions taken here often influence the price of oil.

The Price of Oil – Where To?

For currency traders, the price of oil has significant importance – it influences inflation. As such, higher oil prices lead to higher inflation, and a decline in the price of oil leads to lower inflation.

The problem becomes acute when inflation is already low, and the price of oil keeps dropping. The threat is that the economy falls into a so-called “liquidity trap,” where inflation drops below zero due to lower oil prices.

Because of this direct influence that the price of oil has on inflation, the developments on the oil market matter for all central banks. Also, it puts tremendous power in the hands of oil-producing countries, as by controlling the supply into the market, they can effectively influence the price of oil and, indirectly, inflation.

From a technical analysis perspective, the price of oil found support at the $40 level in 2015-2016. It even reached the $30 mark but quickly bounced back above the $40. A clear break above the $45 may lead to more advances towards the end of the year.

The drop from $100 to $30 in less than two years sent a disinflationary shock across the world. Because it happened so fast, the effects of the drop in the price of oil were seen only in the following years. Now that the price of oil dropped even below the zero level, the negative effects on inflation are likely ahead of us still.

Sure, central banks can only fight it by buying more bonds via the quantitative easing programs. But what the chart above tells us is that the energy market changes as the world prepares for greener projects. Yes, oil still has the biggest slice of the energy mix, but it is shrinking by the day.