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Is The Oil Plunge Just Another Stimulus?

OK. So oil just keeps sliding, and sliding, and sliding. It has already been 5 quarters since oil began this latest plunge at the end of June 2014. And analysts are saying it's going to stay this low for another year or two more. Are you wondering what I'm wondering?

Yes, China is slowing more than anyone expected (and probably more than its government is revealing). And yes, Europe has a long way to go before getting back to its normal economic speed. And the U.S. is still navigating through shallow waters. Hence, the lower demand for oil is definitely a major factor in oil's plunge. But I strongly suspect there is more to this story than slowing demand.

What more? More stimulus, that's what more. The U.S. Federal Reserve missed its opportunity to raise interest rates in Q1 or even Q2 of this year. Now it can't. If it had raised rates earlier (hindsight is always a pest), it could have lowered rates this winter as a little "psychological boost" to the market. But as it is, the Fed has nothing to water the ground with to help U.S. businesses grow.

Japan's central bank is still nowhere near ending its loose monetary policies now some two years in. Europe for its part has just begun its stimulus a few months ago, so it too has its hands tied. There really isn't very much more any of these central banks can do to stimulate growth in their respective regions, except...

Except what? Perhaps a little secret meeting with oil producing nations the likes of the U.S., Saudi Arabia, Venezuela and others? Ask any industrial company and they will tell you how high energy costs are a dead weight seriously slowing down their growth. Cutting energy prices by more than 50% would really come in handy during these desperate times, now wouldn't they?

Of course. So despite an oversupply of oil that literally has no place to go (not only are warehouses full, but oil tankers aren't even being unloaded and are just sitting in harbours all over the world), still oil producers keep producing. They just keep pumping the stuff out.

Why? Because their economies need the oil price to remain suppressed to help companies big and small reduce their expenses and stay afloat. With central banks having already thrown everything they had at the problem, low oil prices are the last medicine in the cabinet.

If this is correct, that oil inventories are being held high in order to keep oil prices low as a last ditch effort to stimulate businesses, then we can expect oil to remain low for a good long time to come. How so? Because the global outlook for growth is grim. There is absolutely nothing on the horizon that looks anything like a refreshing rainfall on a heat parched economic landscape.

Until those rains come, there is no way the global junta of economic policy makers is going to allow oil to find its natural supply/demand levels and consequential market price. It will remain suppressed as long as growth remains suppressed.

Avoid the energy sector for while. A long while.