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El-Erian Calls Oil Market ‘Unhinged’

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If the past two weeks are any indication, Mohamed El-Erian is spot on when he describes the oil market as “unhinged.”

On Monday, crude oil prices soared to close to $49 a barrel – up more than 27% over the past three days and the largest three-day percentage gain since 1990 – before diving 7% on Tuesday to $45 a barrel.

Meanwhile, the week before oil fell below $39 a barrel for the first time since 2009.

In an episode of CNBC’s “Fast Money” on Monday, El-Erian commented on oil’s recent behavior and what kind of effect it could have on stocks and the economy.

“Looking ahead that’s what we’re going to get – more and more volatility – both on the way up and the way down,” El-Erian, chief economic advisor of Allianz and former CEO and co-chief investment officer of PIMCO, told “Fast Money,” adding later, “This is an unhinged market having lost its three anchors. It lost its demand anchor, its supply anchor and it lost its swing producer, and therefore any small bit of news will move it enormously.”

The news El-Erian may be referring to is an OPEC publication released on Monday that alluded that OPEC “stands ready to talk to all other producers,” leading many to think OPEC may be willing to cut back on output to balance the market.

While El-Erian predicts more volatility, does more volatility also mean that markets could go lower?

“It does in the short term because of the extent that low-vol paradox sucks people in, right?” El-Erian said. “So who hasn’t been shaken yet? The retail investor has been shaken somewhat. Fast money has been shaken, but the institutional investor has not been shaken as yet. So keep an eye on what these long-term institutional investors do because they’re the ones right now that haven’t really adjusted their portfolios and the asset allocation to the higher volatility.”

What oil needs is a stabilizer, El-Erian says, which could be difficult in the current environment.

“Yes there’s a lot of cash on the sideline including on corporates’ balance sheets, but that in itself can’t be the stabilizer,” he said. “It needs an external stabilizer. With the economic problem shifting overseas, the Fed is not as powerful a stabilizer as it has been in the past. And the global economy is really fluid. We have a two-speed economy; the U.S. continues to do well, the rest of the world is struggling, and that puts the Fed in a really difficult position.”

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