Weekend March 29, 2015
Professor Elam's weekly newspaper column appears in the Odessa American and the Andrews County News.
At Home in the Range of Oil Prices
Well it’s Friday and time to pull together the last two weeks’ action. Energy commentary is about as vague as it gets, consider the following.
We still have quite a lot of variables that could affect the spot price for a long period," Barclays Oil Analyst Miswin Mahesh told CNBC.
"If you look at Iranian oil production if sanctions are removed, what would they bring into the market, what could Iraq bring into the market?," he added.
(Note to self, work on getting paid for wondering on television).
Analysts at Goldman Sachs add that the move lower in oil prices since last June has happened at a time when rise in the U.S. dollar's value, and corresponding fall in commodity currencies such as the Australian dollar and Chilean peso, reduces the cost of producing energy.
"This puts downward pressure on commodity prices and in turn reinforces U.S. growth, a stronger dollar and lower oil prices, suggesting the risks to costs are distinctively skewed to the downside," the Goldman note said.
(Note to self, enroll in creative writing class, prices are not falling they are subject to downward pressure, sprinkle in references to obscure currencies like the Chilean peso).
Okay, enough. Such speculation about what might happen is never as valuable as an unbiased examination of what the actual market is telling us. Which is what we do in this space.
The most significant event of the last two weeks regarding oil prices was an apparent top in the unstoppable, Ever Ready Bunny of the Dollar Index. In round numbers the Dollar Index has run from 85 last October topping just over 100 in the last two weeks. Viewed on the same graph, West Texas Intermediate Crude Oil versus the Dollar Index exhibit a near perfect inverse relationship. Translated, the dollar was up, pushing oil priced in dollars down. And then, of course, there is the over abundance of supply. The Dollar Index plunged five points on March 18. Since then it recovered and stair-stepped down bouncing back Thursday to 97.79. That boosted crude oil from under its low of $43 to a 4% spike Thursday posting an intra-day high just over $51. It has settled back to $50.22 Friday Morning. So what does that mean? It means oil is still range bound in the face of a high Dollar and overhanging supply.
Perhaps the US is experiencing ‘growth.’ But most of that ‘growth’ has been stock buy backs using nearly al the Fortune 500 earnings. The stock market continues to display what we tech types call a broadening top. Here are some other warning signals.
- The stock indexes are displaying much the same action as in the Spring of Year 2000. Then stocks rallied hard in February only to wander sideways afterward. Prices dropped into mid-April.
- Stock indexes posted highs last November which have been barely exceeded since.
- The Dow Jones Real Estate and REIT indexes topped in February and headed down since. Recall that Fannie Mae is now crowding newbie’s into 3% down mortgages, shades of 2007 all over again.
- Oddly the Dow Transports are down 3% so far this year. Why is that when energy prices have declined 50% since last summer?
- Volatility has returned big time with huge swings like the 298 point Dow Industrial drop Wednesday.
Bear markets finally bottom with capitulation; participants throw in the towel swearing they will never play that market again. My sense is that we are not there yet for oil prices. So, bold prediction, prices will rise as long as the US Dollar pulls back. But this looks like a mere correction for the Dollar, Uncertainty and potential conflicts along with world debt denominated in US Dollars back the demand for, yes, Dollars.
We suspect a final low in oil prices will not arrive util this summer. If the DOW Industrials finally exhibit a weekly close under 17,200, that trend turns down. That may be a set-up for a significant low by mid-April, tax time.
For now the stock markets look much like the topping period of early Year 2000. And oil prices, well you know, are subject to downward pressure.