Tags: Oil | dollar | market | US

Oil Will Tell the Tale of the Tape

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Thursday, 19 Mar 2015 08:29 AM Current | Bio | Archive

This is a weird market.

It is an environment characterized by a solid U.S. economy versus an anemic and sputtering global economy. This dynamic is being complicated by divergent central bank activity as our own Federal Reserve is tightening while central banks in Europe, Japan and China continue to ease.

The relative U.S. economic strength combined with the divergent central bankers has caused the U.S. Dollar Index to soar 25 percent since the summer. The precipitously rising greenback has both drawbacks and benefits that further complicate the landscape.

At the same time, there is no real catalyst to drive U.S. stocks higher or lower. Earnings won't drive prices higher because it is clear that first-quarter earnings are unlikely to be very good. But the anticipated subpar earnings aren't driving stocks lower because they come with built in excuses of a brutal winter (like last year), earnings crashes in the energy sector and the strong dollar.

It's still too soon to gauge what kind of an earnings year this will be. And it is still not clear whether or not the global economy has found a bottom. So far this year, the S&P 500 has sort of violently gone nowhere.

Nowhere are the current uncertainties better exemplified than in the oil market. The price of crude oil has crashed 60 percent since last summer. Having stabilized for a period, West Texas Intermediate crude oil prices have recently embarked on another downward leg. Oil is now approaching the financial crisis lows of 2008.

Oil has crashed because of a combination of factors. Increased supply from the U.S. shale boom along with more oil coming online from Libya and Iran has met sluggish demand in a slow global economy. The soaring dollar has also been factor, as oil is priced in U.S. dollars.

The above-mentioned dynamic of relative U.S. economic strength and divergent central bank policies has played a huge roll in knocking oil down. The recent down leg in oil prices isn't being caused by a worsening of circumstances, but rather by an absence of clear direction. With no verdict in on the global economy and no serious reduction in supply, there is no catalyst to drive oil prices back up. The price is falling now because of the lack of anticipated upward forces in the near term.

Oil is a prisoner of the current circumstances. But at some point something will have to give. Either the global economy will have to ignite or supply will have to be reduced. Although it hasn't happened to a significant extent yet, U.S. production will be significantly reduced if oil prices don't rebound. According to the CEO of Chevron, the average shale well depletes by 70 percent in the first year of operation. Over time, simply not establishing new drilling sites will curtail oil production.

The stock market is bouncing around with no clear direction. Oil is a victim of the very same circumstances causing this lack of direction. Most likely, the fate of stocks in 2015 will be played out in the oil market first. At this fork in the road, oil is the market barometer.

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TomHutchinson
This is a weird market. It is an environment characterized by a solid U.S. economy versus an anemic and sputtering global economy. This dynamic is being complicated by divergent central bank activity.
Oil, dollar, market, US
522
2015-29-19
Thursday, 19 Mar 2015 08:29 AM
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