• Wealth Management

Why the Bear Market in Oil May Not Last

A plunge in the price of crude in the last six weeks caught many investors by surprise, but it may prove short-lived.

When the stock market was sliding in October, investors didn’t pay much attention to the decline in the price of oil. But by November, stocks started to stabilize and oil kept sliding, and investors took notice. Crude is now down more than 20%, a technical bear market. Brent has fallen from a multiyear high of $86 on October 3 to $67 as of Friday.

Lower oil prices can be triggered by weaker global demand for energy—a troubling economic sign. However, I don’t believe that is the case.

True, global demand has apparently taken a hit due to trade-related disruptions. But I think that is temporary, especially if U.S. China trade relations improve, as now seems likely. Global gross domestic product growth is projected to climb nearly 4% this year and next.

The main reason for lower oil prices is a surge in supply, which also may prove to be temporary. For example, a big part of the increase came when the U.S. lifted some sanctions on Iranian oil exports for six months. At roughly the same time, Saudi Arabia increased oil production. Also, U.S. fracking output has been stronger than expected, mainly due to favorable weather conditions. These conditions are likely to shift in the coming months.

Bottom Line: Morgan Stanley’s Global Oil Strategist Martijn Rats expects oil prices to rebound near the end of the year. That would lift energy related stocks and bonds. I suggest investors resist the urge to sell now and instead opportunistically add to their holdings in energy stocks and bonds with good cash flows and healthy dividends.