Insights & Advice

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Markets are in half time.

Stocks have had a wonderful run since mid-October’s swoon. The S&P 500 Index is now up over 10% from its bottom. As we approach another record high, expect some backing and filling before moving higher. I wish I could say the same about the price of oil.

The price of oil is the main topic of conversation among traders and investors. Typically, as the price declines further, Wall Street energy bears vie for headlines by predicting even worse times ahead for energy. Technicians are now considering $40/bbl. as a real possibility and others are jumping on the band wagon as oil broke $75/bbl. on the downside this week.

Methinks the selling is overdone at least over the short-term. We are only a week away from the OPEC meeting and I expect some traders will cover their shorts until after the meeting. What we do know is that Saudi Arabia needs $85/bbl. oil to balance their budget.  But that Middle East nation is both wealthy and autocratic. It can afford to watch oil drop lower if they choose to. Besides, there may be other reasons in the wind for allowing oil to slide lower.

Excuse my penchant for Machiavellian plots, but it has occurred to me that the nation that is hurting the most from this price decline is Mother Russia. Globally, Russia is the number one producer, followed by Saudi Arabia, while the U.S., at 9 million barrels/day in production, ranks third.

Readers may have noticed that now that the weather has grown colder, surprise, surprise, events are heating up once again in Ukraine.  Vladimir Putin, in my opinion, plans to annex even more territory in the east of that nation. If Europe protests or threatens to increase economic sanctions as a result, Putin could threaten both Ukraine and/or Europe with a cut-back or even a cessation of energy exports. He has done it before and there is no reason to believe he won’t do it again.

If I know that then surely others do as well. If I were the U.S. (and its ally, Saudi Arabia), lower oil prices would be a far more effective tool to slow or even stymie Putin’s land-grabbing schemes than sanctions. At the same time it would give a real shot in the arm to American consumers, airlines, farmers, shippers and the transportation sector.

At some point, declining oil prices, coupled with the existing economic sanctions, could truly devastate the Russian economy and bring Russia to its knees. Right now, the Russian people love Putin and his misguided efforts to restore the Soviet empire. Will that adoration persist in the face of a deep recession or even a depression?

We blame Saudi Arabia for not acting to support energy prices. Pundits (including me) have claimed that it is their intent to slow U.S. shale and gas production, thereby hurting America’s efforts in becoming energy-independent. Maybe so, but at the same time, it is hurting Russia far more than the U.S. and that’s my point.

As for the markets, this last week has been largely a period of consolidation or sideways movement. Markets are overbought and need to work off the excesses, which is exactly what is happening. Remember, markets can adjust by either declining or sideways movement. All year long, we have seen a pattern of sideways rather than down so expect more of the same. Stay invested and enjoy the coming rally into the New Year.

Posted in A Few Dollars More, At the Market