I’m a muscle car guy- always have been, and probably always will be. For you non-car folks, it means I go ga-ga over classic cars and big engines…and along with that comes big gas station fill ups. I remember not too long ago when it took all of $70 to fill up my Hemi Jeep…last week I filled up in New Jersey for $20! The old saying, “good things come to those who wait” sure is making it easier on my wallet, as it is for all of you. Many people have asked me how the price of oil correlates to the crummy performance of the stock market in the past 6 months or so, so let’s look at it.
Crude oil prices, priced by the barrel, have fluctuated from a high of approximately $120 a barrel in 2013 (not very long ago) to a low of $26 a barrel in this past January. If we go back further, in the mid 1800’s it was as low as $10 a barrel, and throughout most of the 1800’s fluctuated between $20 and $80- not much different than modern day today in the 21st century. What causes the fluctuation, you ask? Good question. The biggest influence is supply and demand. In the past, OPEC, a group of oil producers responsible for most of the past supply of oil in the world, would “tighten” meaning slow down on production or “loosen” meaning increasing production. However, the past few years have brought a big change to the game. Though criticized, in the past 10 years or so both the USA and Canada have begun fracking- a method of pumping water into the earth to force out natural gas. While there is great debate on this issue, my job here is to educate, not debate, so let’s just let this one go! Zoom forward to 2016, and the USA and Canada are now the biggest producers of natural gas- giving OPEC a run for their money…literally. OPEC, as impossibly rich and obstinate that they are, refused to cut production and are still pumping at a rate that they literally have no place to store it. Thousands of barges floating in the ocean, stored in huge tanks and ground facilities, and they are still pumping at full levels. Additionally, the beginning of the year brought a lift of sanctions in Iran, and they are now pumping at a rate of 500,000 barrels a day- with nobody to sell it to. Needless to say, the supply side far, far outweighs the demand side, keeping prices at historically low levels. Can we then conclude as long as oil is down in price, so will be the market? No, not really.
It’s important to understand that the performance of the broad markets (Dow, S&P, and NASDAQ) is influenced by so many things beside the price of oil. World-wide events (please refer to “From the President’s Desk”), interest rates (just starting to rise after 9 years), inflation or deflation, recessionary tendencies or recession, corporate earnings, investor fear or confidence, war and conflict, change in tax rules and laws, and in our case, an election year. The market, like oil, is driven as well by supply and demand. If a company is doing well, the demand for the stock is driven up because everybody sees a potential path to profit, and the opposite to a company doing poorly. My take on this whole thing? Just like you, I am enjoying a $20 fill-up…enjoy it while you can…nothing last forever…including the direction of the market.
