posted on 28 December 2015
by Michael Haltman
Recently Brent crude hit its lowest level since 2004 while West Texas Intermediate hasn't had spot prices this cheap since about 2003 (see chart below)!
Market experts are in general citing surging levels of crude supply with no appreciable decline in that supply anywhere on the horizon as the major reason for the price drop.
A popular connection is also being made by pundits that a correlation exists between crude oil price movement and the price movement of stocks. In other words as crude declines so do stocks and visa versa.
According to some experts, this correlation could run as high as 70%.
That said, let's take a look at the price movement of the following indices...
S&P 500 All-Time High (reached in 2015) = 2130.82
S&P 500 Friday, December 18, 2015 = 2005.55
S&P 500 High October 12, 2007 = 1,561.80 (2005 approximately 1,250)
WTI 2015 High = $65.56/Barrel ($145.58/barrel reached in 2008)
WTI Friday, December 18, 2015 = $34.80/Barrel
So What Comes First, The Chicken Or The Egg?
Correlation or no correlation?
S&P 500: -5.9% from the 2015 high (also the all-time high)
WTI Crude: -46.9% from the 2015 high (-76.1% from the all-time high)
With WTI down and stock futures up this morning I pose the following question concerning 2016 and the supply of oil, stock prices, consumers, real estate, the economy, etc.
In 2016 will the falling crude prices that has put money into the consumer's pocket finally translate into increased spending and result in a boost to the US economy (a de facto tax cut)?
Or, is the declining price of crude more than simply a supply/demand issue and actually a harbinger of a recession to come?
And if declining oil is in fact due to weak global economies rather than supply and demand will the resulting decline in corporate earnings spell risk to stocks trading at the current levels?
Any thoughts, as 2016 is on the horizon, would be appreciated!
Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at firstname.lastname@example.org.
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