Oil’s Impact
There can be little
doubt that all major markets (except maybe oil) are in a trading range.Â
Equities and FX alike offer little to no edge at present time. Rather than
repeat the same old story, why not take a moment to discuss some of the reasons
that may be contributing to this trading range and whether or not there may be
some opportunities to be had. By no means do I rely solely on macro analysis
for my trade selection, but sometimes a little perspective can go a long way
when the charts eventually start indicating that the range is expanding.
There is little doubt that rising oil prices are
weighing on the markets, as are the increasing geo-political concerns. However,
is the rise in oil prices really attributed to terrorist threats or simply to
insatiable demand from Western countries? The implications of the latter are
rather interesting.
While supply disruptions are a legitimate
concern, it would appear that supply in Saudi Arabia in particular is well
protected. Since the 1970’s when tensions were at a high, there has been little
reason to believe that supply disruptions are imminent.
What is more likely is the increased demand for
oil and low levels of capacity in the refining sector are the real long-term
causes for sustained high oil prices. Both refining and tanker spare capacity
are at their lowest levels since the 1970’s. Significant investment will be
needed in these areas to allow supply to catch up with demand.
In the meantime, there is the concern that
sustained high oil prices will damage economic growth going forward; this is
likely the biggest obstacle to the equity markets at present time. The market
is arguably priced for perfection and any significant setback would be a
negative for markets. According to most estimates, a sustained 10% rise in oil
prices (oil is up 30% YTD) would result in 0.3% decline in world GDP. So, if
demand is the primary long-term driver of higher oil prices, perhaps the easy
monetary conditions need to be reviewed. Given that rates are likely to go
higher later this year it is not completely out of the question for continued
higher oil prices to force the Fed’s hand sooner rather than later.
Regardless of the outcome, right now is not the
time to be trying to outguess which way the market will go. With Summer fast
approaching, trading ranges are likely to become more the norm. However, with
all the events happening in the world today, the Summer could very easily serve
up some great trading opportunities. Simply look back to the Summer of 2002.Â
Like most traders, I was gearing up for a typical slow Summer –Â trade the
mornings, then get the heck out of the office. Within a matter a two days in
late June I went from working two-hour days to trading bell-to-bell for a month
straight, making nearly half a year’s income in a mere four weeks. As traders,
we simply never know what is going to happen tomorrow; perhaps that is why the
business is so seductive. In the meantime, lay low, and live to trade another
day.
As always, feel free to send me your comments and
questions. Enjoy the weekend.Â