Oil and the Markets

With Oil easing a bit in price today, its as good a time as any to review several recent articles worth referencing, as they — and their charts — are instructive:

First up:  Floyd Norris in the weekend NYT.

"OIL is on the move again, but that fact is only starting to attract the kind of attention that greeted the move last summer, when the nearby futures price briefly traded over $70 a barrel on concern about the impact of Hurricane Katrina.

But this move may be more important, even though the price now is just $68.35, below the summer peak, because it reflects a market that is becoming more worried about the future."

click for larger graphic20060121_charts_graphic

courtesy of NYT

"The first chart to the right shows the nearby crude oil future, as traded on the New York Mercantile Exchange. It shows the nearby future at all times, with the February contract being the earliest contract available now.

The next chart paints a different picture. It shows the market forecast for oil prices in December 2007. And that price, currently $69.05, is above where it was last summer and is higher than the current spot price.

The difference in the behavior stimulated by the summer run-up in prices, and the results of the current one, may yet be significant. That was widely viewed as a temporary event of uncertain duration – the hurricane recovery – added to a demand shock that had come from China’s growing use of petroleum. Congress passed an energy bill with help for oil companies but little to encourage conservation."

On top of that, the WSJ reports  that the DJIA cannot get up when Oil is rising:

Slick_20060122While the Dow industrials are down 0.5% for 2006, after a decline of 0.6% last year, the S&P 500 and the Nasdaq Composite Index both were up last year and still are showing gains this year. But Mr. Tower does worry that a bear market could begin some time this year, as investors become disenchanted with corporate performance and some are enticed away by higher interest rates in money-market funds and bonds.

If investors adjust this week to the Iran worries, some of that selling
pressure could ease. But a more fundamental reason that investors are
nervous is that they fear that some of the market’s underpinnings have
weakened, making it harder for stocks to hold up in the face of the oil
and profit worries.

So, is the bull market running on empty or is it about
to speed up again? More fourth-quarter earnings results in the days
ahead will provide clearer indications.

If big companies avoid too many disappointments along
the lines of GE’s and Citigroup’s, if the world political situation
calms down and if, after its meeting on Jan. 31, the Fed indicates
again that it is getting near the end of its rate-increase cycle,
stocks could find better support. If those things don’t happen,
investors will pay more attention to other concerns."


The last column that caught my eye was this NY Times discussion:

At a time when energy prices and industry profits are soaring, the federal government collected little more money last year than it did five years ago from the companies that extracted more than $60 billion in oil and gas from publicly owned lands and coastal waters.

Shifting Numbers on Price Reports (January 23, 2006) If royalty payments in fiscal 2005 for natural gas had risen in step with market prices, the government would have received about $700 million more than it actually did, a three-month investigation by The New York Times has found.

As a result, the nation’s taxpayers, collectively, the biggest owner of
American oil and gas reserves, have missed much of the recent energy

The disparities in gas prices parallel those uncovered just five years ago in
a wave of scandals involving royalty payments for oil. From 1998 to 2001, a
dozen major companies, while admitting no wrongdoing, paid a total of $438
million to settle charges that they had fraudulently understated their sale
prices for oil.

Hardly makes the industry look good . . .


Oil Price Soars Again, and the Market Gives Signs of a Lasting Trend
Off the Charts
NYT, January 21, 2006

There’s Little Margin for Error
Fuel Pressures Keep Prospects For Economic Growth in Limbo As Investors Begin to Seek Cover

THE WALL STREET JOURNAL, January 23, 2006; Page C1

As Profits Soar, Companies Pay U.S. Less for Gas Rights
NYT, January 23, 2006

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Movie Guy commented on Jan 24

    So, is this the year that crude oil finally impacts the economy?

  2. The Nattering Naybob commented on Jan 27


    Beautiful observation, just makes you wonder, doesn’t it?

    The Nattering One

  3. mike commented on Jan 28

    The futures price embodies a risk premium in addition to the expected future spot price. That would be a negative premium for oil and a positive premium for stocks, since oil has a negative beta. The oil risk premium is bigger when oil prices are higher. So, makes a lot of sense to me.

Read this next.

Posted Under