Folks,
I’ve been doing this a long time. A LONG time. But, I’ve rarely seen a move like we’ve seen in the last two days, and even more, the last three weeks. Maybe never.
I’ve seen collapses that were based in real fundamental changes, like the start of the collapse in 2014, when the gluts in oil finally caught up to the market and traders suddenly realized that $100 oil was unsustainable, despite their belief in a ‘new normal’ of $100+ prices.
That was back in 2014, well before the systemic inflation pressures we’re seeing today. If anything, a collapse back below $100 today is even more astonishing.
I’ve also seen technical collapses, like in 2007, when every speculator that had driven oil from a fundamentally rational price of $90 a barrel to a fundamentally unsustainable price of nearly $150 a barrel decided to get out on the same day. In no way is the power of the speculator in the oil market anywhere near what it was in the heyday of the financial crisis.
Although I definitely think the traders are an outsized influence in the current intense volatility of oil prices.
Even so, I’ve not seen a collapse like this that had neither a fundamental basis that I can find nor a strong technical one either.
The one lone commonality between the two examples I gave, and likely to the one we’re seeing today is the TRADER. There is panic in this move, both upwards and downwards, and the retail traders are following it, to their peril. What we have to do now, is figure out whether that panic is well-founded – and not to panic YOU, but it WAS in both 2014 and 2007.
On the other side of the question – to put confidence back in you for the moment – there have been dozens of other down moves inside of an oil price up-cycle that have proved to be nothing but dips worth buying. My old mentor on the trading floor always said: “choppy (volatile) markets are bullish”.
He was right.
But let’s go through it:
First, let’s make the case for the panickers: RECESSION IS COMING! That’s it – that’s the case. And they could be right, although several economists are saying that recession won’t be a factor until 2023. Other economists, who are agreed that a recession is imminent, are saying that much of it is now priced into the markets.
Don’t get me wrong: I’ve said that a real recession will have a real impact on demand for oil and therefore prices. That’s always been the threat. But keep in mind that the market laggards this year – the tech stocks mostly – have had ten uninterrupted years of rallying that could feed a (healthy) readjustment period. Our energy stocks? Just 8 months. We should just be getting started.
And I think we are: Oil is still at enormous shortage levels worldwide. OPEC’s last increase doesn’t come close to making up the global shortfall. US miles are driven, while slowly coming down, are still at the highest levels ever, even with $5 gasoline. Demand destruction, if it’s coming, looks tame. Nord Stream 1, the major Russian pipeline for natural gas in Europe is down 60% in throughput. Goldman Sachs doesn’t see this as a maintenance glitch but as a systemic withdrawal of Natural gas supply in Europe.
All of this seems to me to be a great reason to take a very hard look at oil and oil stocks – they are at levels we haven’t seen since BEFORE Russia invaded Ukraine in February.
Either that or the world could be coming apart. Again. Seems like that’s been a daily refrain over the last three years, hasn’t it?
Yes – always a chance I could be wrong. I’ve already invested in stocks where the market has continued to trend downwards. I’m aware that if this is a replay of 2014, or (perish the thought!) 2007, I’m going to see a lot of pain.
But I don’t see those signposts. Nothing like 2014 or 2007. All I see is a lot of hand-wringing and an economy that might be slipping into a period of slow growth or even slightly negative growth.
That’s not unusual (or at least it didn’t use to be), nor should it require this level of panic, or even much-investing anxiety.
