Will a Drop in Oil Trigger a Market Recovery?

There is word out there that a drop in oil will bring a resurgence of the stock market. I find this rather curious and laughable, mostly because the rise in crude actually sparked several areas of strength. Contrarily, a big drop in oil is likely to cause some panic and a considerable drop in prices. Let's dig deeper and see how this can manifest.

Crude has Created Several Bull Markets

The rise in crude has sparked new bull markets in certain groups. The obvious include drillers, oil service, discovery and integrateds. We have yet to see refiners set sail, due mostly to cost issues and old, broken down refineries. But outside of oil we have a very strong natural gas segment. This alternative to crude has risen sharply, and those Nat Gas companies are in a great spot for profits. Agriculture names have been white hot this year, too...thanks to rising energy prices. Coal as an alternative to oil has been a stellar performer, and let's not forget solar stocks and alternative fuels. With the high cost of energy, these groups will continue to perform above the market and attract capital.

Can't Blame Oil for This Mess

An inelastic product such as oil or gasoline pretty much have near permanent demand. We can't go without our cars, but unless there is some kind of price shock...10 dollars a gallon?...then we'll just have to deal with it, and drive on. But let's shift gears a moment...what about financials? Near their March lows, can we blame high oil prices for the credit crisis? The housing mess? The subprime mortgage problems? Of course not. If that were the case, then we might as well make oil the scapegoat for all of our problems. In striking fashion, the markets have maintained their balance, save for the financials and retailers.

So, what might occur if oil does fall sharply? Is that capital going to rotate into the sick financials? Hardly so. Other groups...tech maybe? materials? consumer goods? All good possibilities, buy my bet is those funds will find their way into gold, silver commodities or bonds...just for lack of better opportunity. I just don't see the market accelerating faster with a decline of oil, just like we haven't seen it crash with oil reaching these heights (did we crash? if so...I must have missed it).

Disclosure: None

Comments

[fatcat]

Author is mostly right..short term would rally,then reality would set back in and it would be back to bearish,IMO..

[King of Sanity]

Hello???? Am I hearing this straight?? What in God's green earth will it take to understand just how bad our economy and those of industrialized countries are going to get if oil does not drop to well below the $100.00 to at least $50.00-$65.00 and remain at that level for at least 3-5 years. If this happens, we will see a bull market equal to, or surpass that of the 80's. There is absolutely no way that our economy can withstand oil prices over $100.00 for the long term. For anyone to insinuate that our economy or any industrialized economy can prosper with oil prices over $100.00, must have flunked out of trade school. whether we like it or not, energy is the catalyst that drives our economy. To say otherwise is just plain foolish.

[drmalaka]

I found the talking head television comments on this hilarous. Morons like those guys will cause the market to go up short term if oil drops but the real question is why? I do not recall the market dropping much between March and June when oil went from 100 to 135. These perma bulls are a joke, oil going up never effected their bullishness but if oil drops it will be bullish for stocks.

This is a moot argument. Who cares if oil drops back to $100, how will that make things better? Right now stock prices do not reflect the reality on the ground based on $130 oil. Companies that have higher input prices and shipping prices have not been killed becuase of the oil rise. To see them go up becuase oil drops would not make sense. So if I get this correct, when oil rises it has no negative effect on stocks but when it drops it is positive for stocks.

Bottom line is that the perma bulls and talking heads need to grasp at anything to keep their thesis alive that things are good. Well they are not. Our rediculous American consumer has gotten himself in a horrible position, he can't afford his house payments, his SUV payments, the gas to put in his gas guzzler, the food to put on his table but yet he is still going to Best Buy and buying new laptops and flat screens. Who is a bigger joke, the talking heads or the American consumer?

[Jim Hawthorne]

It was just a short time ago when we were hearing that "world economies cannot withstand oil prices above $50.Bbl! (American Airlines structured their recovery plan on oil <$50/Bbl.) Oil today hovers at record levels due to increasing global demand, the decline in the US dollar, and reaping what we have sown in the middle east.

For years we have heard that we of the western industrialized countries, with some 15% of the world's population cannot continue to consume some 45% of world resources forever.

The piper has arrived and he wants to be paid.

Stuff we NEED is going to remain very, very expensive (energy, food, metals). Stuff we WANT is going to become very, very cheap.

We are in the early innings of a seismic global shift. A great deal of paper wealth has begun to circle the drain.

My question for King of Sanity is, what in God's green earth will it take to drive the price of oil down to the "at least $50-$60/Bbl and keep it there for at least 3-5 years"?

You have the cart before the horse, my friend. Low oil will not rescue the markets. The global economy will really have to tank as never before to bring about a return to the conditions you appear to advocate.

[Michael Levy]

10 Reasons Why Oil Price Speculation Requires a Change in the Rule of Law by Michael Levy

High oil prices that are governed by the commodity markets are in dire need of common sense law and order. When speculation and detrimental logic and reasoning take central command of human society, the results always turn out to be damaging to the majority, at the abundance of the few. The experts and speculators will argue we need free markets and any interference will take away free trade. Well, in many cases they are correct, however, when it comes to essential commodities of food and energy they are completely out of order. Here are a few reasons why essential commodity markets require new legislation.

1. There has been no shortage of gas at any filling station for the past 10 years yet prices are up 1200% because of futures trading going out more than eight years. Even the Saudi oil minister has recently stated the price of a barrel of oil should be no more than $70.00. Demand from China and India is still far less than that of the USA. The Chinese stock market is down 50% signifying a sharp slow down. This news still is not enough to stop the wild speculators hiking the oil prices.

2. When hurricanes hit Florida many gas stations are closed and there is a real shortage of gas for a few days. However, if a gas station increases its prices they will be prosecuted for price gauging. Therefore, if we take the experts argument that there is a shortage of oil then that still does not give anyone the right to profit from the shortage as this is deemed to be prices gauging. How can the USA governments have double standards and prosecute gas station owners who price gauge and not treat commodity markets in the same manner?

3. Oil is an essential commodity for every day living in the same way as water is an essential commodity. It makes no sense to trade water so why leave oil in the hands of anyone who wants to make a quick buck gambling on prices.

4. Pension and hedge fund managers have invested billions of dollars in oil futures. The futures markets are very volatile, thus, no place for pension funds to risk the money for people who trust them to build future wealth. The fiduciary duty of a pension fund manger is to find reasonable returns with low risk and the commodity markets is not that place.

5. If the price of oil was regulated between $40.00 - $80.00 a barrel, the price could go up and down on supply and demand. This would be fair to everyone, for even when supply was plentiful, the price would not drop below $40.00 which will still give a fair profit to most oil related industries. When oil is in short supply the price would be limited to a ceiling of $80.00 which is more acceptable to world economies.

6. There is a moral issue that greed cannot come before peoples basic needs ... No right-minded, ethical, principled government can allow starvation and financial ruin because of a system of trading that is completely out of control.

7. The price of a barrel of oil effects transport, food supply, industrial production and every part of modern day living. If terrorists wanted to devise a plan to destroy the world. economies what better way than finding a method to allow oil to trade at $140.00 a barrel. Why play a game that makes terrorists and anarchists happy.

8. Goodwill to all people is the credo every democratic country is built upon.$140.00 a barrel oil delivers no goodwill. It only brings hardship and political uneasiness.


9. Noble deeds and fair dealing is the hallmark of success for every truly prosperous person. Since the world is made-up from people, where are the noble deeds and fair dealing in the commodity pits.

10. We are all put on earth to help each other succeed in the pursuit of freedom, liberty and happiness. There is no freedom when people are slaves to greed. There are only liberty takers when oil trades over $80.00 a barrel. And finally financial hardship brings misery and discontent.

The time for change in essential commodity trading is now. To quote a few voices from the past...

“Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor”_Thomas Jefferson

“For greed all nature is too little.”_Seneca

“It is greed to do all the talking but not to want to listen at all” _ Democritus

“He who is greedy is always in want.” _Horace

[nakedjaybird]

nakedjaybirdJun 23 02:07 PMWhere have some of you folks been? In "school" maybe???

In the early 1970's we concluded it was going to take hybrid electric vehicles for anything beyond the basic 40-50 mile daily commuter using fully electric cars, when and if he was ready to switch from huge gas guzzlers (we knew this because we built and tested electric vehicles! And, there is a market for both types of vehicles). The shackles have been off for the private sector for 40 years.

We were also growing silicon ribbon and producing solar volataic panels in the 70's. The shackles have been off for the private sector for 40 years.

We have used windmills for long before many of you folks existed. Seems like we know how to make and use all of the components. The shackles have been off the private sector for a long time.

One of the major problems is the selfish consumer. His shackles have been off - he's had some free choices.

Another major problems is we have permitted our Government give our tax dollars to big oil thru tax breaks (research, investestment credits, depleption allowances, and on and on).

WE HAVE NOT DONE THE RIGHT THINGS;

NOT EVEN THE THINGS WE WERE/ARE CAPABLE OF DOING. BUT........... THAT ..........

Didn't stop France from going 80% nuclear.

Didn't stop Germany from going 40% solar.

Didn't stop Brazil from going 60% biofuel.

Didn't stop Switzerland (and many other European countries) from going electrified rails for people and goods, and even electric ferries (they put rubber tired hiway diesel busses on electrified rail cars for certain legs of their journeys).

Didn't stop Europe from building and using small economical cars, nor electric delivery vehicles, etc.

So where has the US been??

I guarantee you, without LEADERSHIP, we will not get there....................

We have had the techonologies; we've had the money; we've had the resoures; we've had our heads somewhere, like where the sun doesn't shine.

AND FOR THAT, THERE IS JUST TOO MUCH EVIDENCE!!!!!!!!!!!!!!...