Monday, April 6, 2009

Don't fall into the equity trap for oil

Lately, oil has been closely tracking the equity markets - most recently, it closed down for a second straight session (after a high of 54.66, just short of our band at 55) on the back of a poor day in equities. We believe this makes no sense as we think that oil needs to respond more directly to aggregate demand (as we've discussed before) instead of using the equities market as a proxy for aggregate demand. 

Tracking equities as a real time demand proxy may make sense in normal times when demand is dictated on the margin and capital structures and credit markets are operating within a familiar band. However, these days the macro factors will continue to drive the long-term trends (see the minimal reaction to OPEC shifts, collapse in Baltic Dry, dismal export numbers globally). To that end, every false equity driven "recovery" is bound to get smacked back down until the fundamentals are fixed.

Eventually, oil is going to decouple from equities and when it does it's going to break long faster than equities. We'll cover the specific macro factors that need to be addressed and consequently will serve as important indicators for an oil recovery in another post.
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Anonymous said...

Interesting post, look forward to seeing the more detailed post on the macro factors.

Also, good call on the Australian rate cuts... it was just released that they were cutting by .25 like you said.

Anonymous said...

AMEX Oil index is down 35% yet oil and nat gas are down 2x that much. the index also hasn't even come close to testing its nov 20 lows, much less early march. the oil sector is the next sector that is going to get whacked. hedgies still love the energy/materials playground, with their huge betas.

Also, too much money banking on the inflation trade. Given the structural dynamics/fundamentals, oil is a poor inflation hedge.

oil will leg down again...$25bbl...nat gas is a wreck, too...sub $3mcf just around the corner. laying down rigs...blah blah blah...rig counts went up last week for the first time since october...and horizontal drilling rig production only recently went negative in february. pile on lng and nat gas doesn't have a prayer.

Anonymous said...

@Anon #2 Unfortunately for nat gas and LNG there is no OPEC, oil doesn't have to follow nat gas down. If the Saudi's want $45 they'll get it.

Anonymous said...

Oil is not one of the US government's preferred channels for speculators to drive up prices. Safer to just stick with stocks.

CFischer said...


I also disagree. Try looking into some of the demand numbers for oil. It's actually up y-o-y in some categories.

Cornelius said...

I have little faith in OPEC controlling much of anything, unless they get really drastic.

CFischer, I'd be interested to see that data. My feeling is you may be selectively reading into the data or it may be a head-fake in the numbers but I'd like to learn more about it.

CFischer said...


Check out, look at the charts from 02 Apr.

Over the last 8 weeks or so gasoline demand has been on par with last years numbers (granted, it was $3+ then and it's around 2 now.) I don't think it's a headfake, just a result of the product being 30% cheaper.

Distillate demand, on the other hand, has been pretty crappy.