Thursday, May 29, 2008

It’s the Oil, Stupid

When it comes to volatility, there are few catalysts that can spook the market like the prospect of an oil shortage. With today’s announcement that crude oil inventories fell 8.8 million barrels when analysts were expecting a slight increase in inventory levels, the markets reacted sharply, with crude futures immediately spiking almost $4 per barrel to over $133. In spite of today’s jump, crude is still trading below the all-time high of $135.09 and has pulled back toward 130. Still, 135 will be an important resistance level to watch going forward. If 135 holds, volatility should be contained; if it is breached, expect equities to face and volatility to surge with crude prices.

One more thing: tomorrow is the last trading day before the official beginning of the Atlantic hurricane season…


Bill Luby said...

The Bonddad Blog has a different concern: It's the Debt, Stupid

Taken together, oil and debt are a dangerous cocktail...but maybe we should be talking more about stupid and less about the proximate causes of stupidity.

Anonymous said...

in the long run most of the crude rich countries are net importers and subsidized consumers of refined petroleum products. the true long term debt being incurred here is not by the US - we control our downstream, but by the countries who essentially give the lion share of their crude-related profit away at the gas pump in exchange for some political chips with the masses.

Grant Stern said...

Very counterintuitive things about the decrease in inventories . . . Normally this indicates supply tightness, but this time, it indicates that inventory levels are being kept intentionally thin as the price is high.

If the price appears to be speculatively high, the rational buyer postpones the purchase until it's absolutely necessary, in the anticipation of lower prices (see real estate market circa 8/2007 through 5/2008). In other words, the high prices are thinning inventories due to delayed purchasing, not due to increased demand. Right now, demand destruction is eating away at the underpinnings of Oil prices. Go short in October and you'll beat the oil crunch.

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