Is Crude Oil the Canary in the Coal Mine?

Twenty-seven dollars. That was the price of a barrel of West Texas Intermediate crude oil on Wednesday.
It marked a staggering 74% plunge from the summer of 2014, when WTI crude traded as high as $105 per barrel.
For the last 18 months, market observers have tried to call a bottom for oil prices. They’ve claimed that oil would find a bottom at $70, $60, $50, $40, and most recently $30. And yet the free fall continues.
Earlier this month, Morgan Stanley suggested that oil could be headed for $20. In that report, analysts wrote, “Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency.”
Unless you work in the oil patch, lower oil prices are typically a good thing. I won’t ever complain about paying less for gasoline at the pump or propane to heat my home.
Of course, lower oil prices are hurting energy stocks. That in turn has taken down overall earnings for indexes such as the S&P 500. The major index of blue chip American stocks is now expected to report three consecutive declines in quarterly earnings, largely due to the energy sector.
Yet the concern for investors should not be energy stocks. In my Million Dollar Portfolio, I’ve avoided any direct exposure to the sector and have tried to insulate myself from the decline. And you’ve had ample opportunities to do the same by selling these stocks at any time in the last 18 months.
My biggest concern is that crashing oil prices could be the “canary in the coal mine.”
As you may know, coal miners brought caged canary birds into the coal mines. If dangerous gasses – such as carbon monoxide – were present, the birds would quickly die. And that would serve as an urgent warning to the miners to get out before they suffered the same fate.
So what’s the connection with oil today?
There are many factors contributing to oil’s decline. The Chinese economic slowdown, soaring production in America and the strong U.S. dollar are a few of the top reasons.
But oil prices below $30 could point to a much larger looming problem: slowing demand.
With oil actually trading around $30, it tells the market that there must be a demand issue. We know that global growth is slow. In particular, economic growth in China and other emerging markets is slowing down.
The International Energy Agency is already estimating a slowdown in demand. The group predicts that consumption growth will fall by 1.3% in 2016.
Thirty-dollar oil could be the canary in the coal mine. It could be telling the market that the global economic picture is far worse than expected.
That’s why the stock market is spooked. If the global economic picture is worse than currently expected, we could be looking at an upcoming recession. And that certainly could send stocks into bear market territory.
Yesterday and today, oil futures rebounded above $30. Perhaps this will mark the actual bottom for oil prices. I certainly hope so. Because if oil continues its decline, stocks will march lower as well.

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