There is no consistent correlation between stock and oil prices

New Year, Oil-D Habit

The following was first published on Elliottwave.com on 1/4/06

Three days into a brand new year AND old habits are dying hard: Britney Spears is out partying, Nicole Richie is back in rehab, and Mr. Main Stream financial media is feeding its craving for fundamentals.

Take, for example, the highly addictive notion that a slip in crude oil prices brings about a surge in stock values.

This, dear friends, is your brain. And THIS slew of headlines from the morning of January 3 is your brain on such a drug:

 

1. "US stocks inaugurated 2007 with a triple-digit rally after a drop in oil prices [and other sundry] sparked optimism about the economy." (AP)
2. "Oil plunged below $59 per barrel for the first time since November. You could have another excellent year for stocks in 2007 to the extent that oil stabilizes, it definitely will help on the consumer side." (Bloomberg)
3. "US Stocks point higher on oil's decline." (Reuters)

What state are these from?

The state of Denial.

That said, we are left with only one possible course of action: Intervention via this groundbreaking chart of the 52-week Correlation between the S&P 500 and crude oil prices from 1996 to 2006, as presented in the July 25, 2006 Elliott Wave Theorist.

http://img518.imageshack.us/img518/4...62006smbv8.gif

http://72.14.253.104/search?q=cache:...a&ct=clnk&cd=1

http://www.zealllc.com/c2005/Zeal102105A.gif

In the words of EWT: "There is no consistent correlation between stock and oil prices. That's the market's job: to throw a snowball in the air to catch your attention so that when you look up, it can smack you in the jaw with another one."

Now, before you enter a world of anger, bargaining, and depression -- consider what else the July 25 Theorist had to say about where the oil market would be by the end of the year:

"A myriad of signs point strongly to a selling opportunity in oil. The psychological environment demands that we continue to pay attention to the original wave interpretation, which implies a top is occurring now. A setback of at least Primary degree is due."

FYI: From their July 14 peak, crude oil has crumbled over 20%.

This is what those in the business of recovery call "A Breakthrough" Moment, many more of which are in store for readers of the December 2006 Elliott Wave Financial Forecast.

The media gets paid to write and talk about the markets. The only part they get right is the pure numbers. The why's and how's and when's they are clueless about.

What they don't get paid to do, is be right in understanding it all.

I agree, Suntrader. In fact, the media pundits feel the need to pretend they know why things happen in the financial markets, when in fact they don't generally have a clue. They probably couldn't trade their way out of a wet paper bag.

Oil Prices: Impact on the Currency Market

Think Oil Prices are Headed to $100?

Less than two years ago, traders were claiming $40 would be the highest that oil prices could rally. Now, $100 a barrel doesn't seem very far-fetched.

Think Oil Could Hit $50? Think Canadian Dollars
Have oil prices bottomed out? After the dramatic fall from the $78.40 peak in July, crude prices seem to have settled in the low $60s. But there are a few things happening—or not happening—that could knock the props out from under that price table.

http://www.fxcmtr.com/images/chart-oil-cadjpy.gif

The chart above clearly demonstrates the close tie between oil prices and the Canadian Dollar / Japanese Yen currency pair (CAD/JPY).

Will oil drop to $40? Or go back to $70? Or $80?

There are no easy answers to this question, but let's see if we can frame some of the issues. First, demand is going to increase over time as an energy-hungry developing world needs more and more energy. Take a look at this chart from the Bank Credit Analyst showing the percentage of global oil consumption that comes from China and India. It is going from the lower left to the upper right, and only slowed down during the slowdown in global growth around 2001 (a point we will come back to later).

http://img212.imageshack.us/img212/8...umptionwp4.gif

Crude prices closed today at roughly $53, down considerably from the $77 of recent memory. Prices are down 10% over the last month. Why? Inventories are high and the northern hemisphere is having an unusually warm winter.

OPEC has cut their production and will likely cut again, as they would like to maintain prices closer to $60. The problem is that OPEC members cheat. It is one of the few reliable factors in the oil business. Much of the actual burden of production cuts falls on the shoulders of Saudi Arabia. They have done the work so far, but will it be enough? There is reason to think they might let oil prices drop even further in the near term. And here, I want to highlight some fascinating research by Ben Dell and his team at Bernstein Research.

Today, there are about 2.5 million barrels of spare production capacity (excluding Iraq, Nigeria, and Venezuela), with almost all of it controlled by OPEC. If OPEC actually cut production as they say they will, they could indeed work through the high inventories and take the price back up to over $60. By the way, excess capacity is on target to rise to 4 million barrels a day in 2008, even with solid growth of 1.8% in world demand. There is a lot of new production coming online.

The problem for OPEC, however, is that most OPEC members will cheat. Will Saudi Arabia be willing to cut enough to make up for their cheating partners? So far, they have. But it looks like they will have to make further deep cuts in production, to 8 million barrels a day, which is below levels not seen since 1991 or the aftermath of 9/11 in 2001.

But they have said they intend to increase their production capacity to 12.5 million barrels per day by the end of the decade from 10 million barrels presently. They are in fact spending the money to increase their capacity, and significant new capacity will come online this year and next.

Bernstein concludes: "The dilemma facing Saudi continues to grow. While cutting back incremental heavy barrels when crude prices were $75/bbl was relatively painless, the country is now facing the prospect of having to drop below 8Mbpd to keep the market balanced. At the same time, Saudi Aramco is undertaking one of the biggest investment programs over the last 20 years, as evidenced by the soaring rig count and multiple field reactivations. Of these, the AFK field is the first to come online in 3Q/4Q 2007 for 500kbpd and 1Bcfd.

"Should Saudi decide to hold back volumes to maintain prices, their proven capacity utilization would probably need to drop to 75-77%, which has historically been a threshold level. While this may sustain pricing for others it would of course lower Saudi's market share, given that few other OPEC members seem inclined to assist. Furthermore, it would continue to stimulate the oversupply in the market, hence prolonging the problem. Evidence of any countries 'cheating' on their production cuts may emerge soon with the IEA and OPEC January reports, which will be published later this month, or through February when the new quota system comes in, and will highlight the extent of the compliance within the OPEC group.

"In reality we think this is not a path that makes sense to Saudi in the long term. A sharp correction in crude prices (and especially futures prices), spurring new demand and delaying non-OPEC capacity expansions would generate short term pain but longer term gain. At the same time, the Saudis would regain control of the market while negating the Iranian threat to their leadership in the region. As always this remains something of a guessing game. However, it appears that there is only so low Saudi will go. Based on history, we are months from reaching that threshold.

"Given the weakening fundamentals of growing spare capacity, moderating demand, the high expectations for the peer group and the weakening gas market, it appears challenging to see 2007 as a year of outperformance."

And thus the dilemma for investors. You can't really trot out a supply demand chart for 2007 and draw any real conclusions about price. Yes, sometime next decade demand may indeed start to bump up against supply, but the price of oil today is as much political as it is supply and demand.

If Saudi Arabia decides that the rest of OPEC is not doing its fair share of cuts, it could simply allow the price of oil to drop to $40 for a short period of time, causing some real pain. The fact that it would hurt Iran as much or more is probably not lost in the inner chambers of Riyadh. At $40 oil, Iran does not have the spare cash it needs, let alone has promised. It could make the current regime a lot more shaky.

A drastic drop in oil prices would let everyone in OPEC know they need to get with the program, also stop a lot of new oil projects around the world and stimulate demand (as lower prices always do). To get all of that to happen might be worth a little fall in cash flow for a few months or quarters. And when their new capacity comes online as world demand grows, the rest of OPEC goes along with production quotas to maintain higher prices. As world demand grows, and prices rise, Saudi pockets even more vast sums of money. And they let Iran know who holds the real power.

Thus, there is no "normal" price for oil. It is still what a few men with willpower sitting around a table decide it is. Ultimately, OPEC will lose that power, as world demand grows past supply, but that is not this decade. At that point, the market will set price.

Of course, the price of oil could shoot up with a collapse in Nigeria, as rebels are becoming increasingly active. Or Iraq or any number of unstable regions that produce oil could have problems.

The Predictive Power of Oil Prices

In the interesting chart of the week category, Michael Panzner sent along this graph, showing how the change in the price of oil relates to GDP growth. There is some correlation. Remember that we noted above that Saudi production dropped in economically slower times? Part of the drop may in fact be due to slower global growth. (http://www.stockmarketjungle.com)

http://img488.imageshack.us/img488/7...ndusgdphp0.gif

I think the Illuminati is jacking up oil prices in order to wipe out the middle class of America and pave the way for the New World Order. What do you think itme?