Negative implications of lower oil price dominate market worries

In 2016, oil prices have declined to the lowest level since the beginning of 2000s. Actually the decline of oil prices should be positive news for the global economy. The drop in oil prices mainly due to excess supply is a positive supply shock, lowering production costs and boosting the purchasing power of consumers. Although the decline in oil prices shows low demand from China and other emerging markets, it should give an automatic stabilizer for the remainder of the world. But currently the markets are disregarding such positive impacts.

At present market concerns are being dominated by the immediate negative implications from lower oil prices. Decline in prices are adding to the high deflation risks that are already present in the global economy. They signal a slowdown in global growth. Along with the decline in other commodity prices, fall in oil prices have exacerbated the EM sell-off. Uncertainty is further increased by the failure of the OPEC and non-OPEC oil producing nations to organise a response.