New Column up at Real Money (06/21/05)


My latest Real Money column, "Will Rallying Oil Set a Bear Trap?" is posted. It is based on a similarly titled post earlier this week

Here’s an excerpt:

"While the tension between the "too-much-cash" and the "not-enough-cash" on hand crowds play out, oil has crept back into the market discussion. The easy conclusion is that any increase in the price of crude is automatically bad for stocks, but the reality is far more complex. A quick look at some charts reveals that, at least for the past three years, there has been a positive correlation between the two assets. Since October 2002, oil has appreciated to $60 from $25 a barrel, a 140% gain. At the same time, Nasdaq has rallied to near 2100 from 1100, for a 90% gain. As far as stocks are concerned, so far, oil’s bark is worse than its bite. To date, it has hardly been the Boogieman so many traders expected it to be.

Of course, reality is less simple: Many of the same forces driving oil over that period — post-recession recovery, massive Federal stimulus, increased economic activity out of China — have also been driving stocks. At a certain point, we will pass a tipping point where oil’s price rises will have more bite, but oil tends to be a self-correcting commodity: Once it gets too expensive, it will significantly slow the global economy. In addition, while the "too-expensive" level remains a guessing game amongst economists, the one thing they can all agree upon is the impact of slower growth: It reduces demand for oil, which drives energy prices lower. As oil gets cheaper, the cycle starts all over again.

Some oil bears have been pointing to the imminent U.S. strategic reserve being topped off later this year as the basis for oil prices slipping over the longer term. They reason that the reduced demand from Uncle Sam removes part of the firm bid below current energy prices. This could (in theory) allow for crude to move back to the $30s. Unfortunately for this line of thought, China has recently announced the creation of its own strategic petroleum reserve, created just as the U.S.’s is filled. But don’t worry, they say they will spread out the storage of crude and heating oil over a five-year period. You can assume that the firm bid in crude below present prices will remain pretty firm until a full-blown global slowdown ensues.


A few people have challenged the assertion that Oil and Stocks can rise together. Here’s a 3 year chart of each:


click for larger charts



UPDATE: June 23, 2005 5:35 am

The full column, sans graphs above, is now posted at MSN, under the title "Will rallying oil prices burn the bears?"

Whoever figures out the seemingly random pattern of which columns get moved to a free site (either MSN or Yahoo!) will get nominated for a Nobel in mathematics . . .   



Will Rallying Oil Set a Bear Trap?  (subscription), 6/21/2005 12:00 PM EDT

Will rallying oil prices burn the bears?   (free), 6/23/2005 1:00 AM EDT

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What's been said:

Discussions found on the web:
  1. IDK commented on Jun 23

    Interesting analysis, Barry. However, does it bother you that “confession” season is starting and companies like F, FDX, and CVTI are already ‘fessing up about the higher cost of oil?

  2. J Lonsdale commented on Jun 23

    It looks like the chart of oil is a year shorter than the chart of Nasdaq. On these charts, the Nasdaq seems to rally in 03 while crude oil’s increase is mainly in 04 though they look like they are similar due to the different spacing.
    I do agree that excess credit can help drive the price of both of these assets up at the same time, but I felt that I should point out that the graphs are mislabeled.

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