The oil market pulls the stock market, the stock market leads the oil market. Is there any practical difference anymore?
The last week of action in oil has seen almost a 20% drop in the price in futures traded on the Chicago Mercantile Exchange. In the
, we've seen a similar, if less incendiary 5% drop. Did the stock market move inspire the oil decline, or did oil move the stock market?
The "endless bid" in oil, my phrase for investment interest in black gold, has never seen such vindication than in the action we've seen the past week. It's caused this uncomfortable volatility we've seen and an "interconnectedness" between oil and stocks that belies logic.
Through ETFs like USO and ETNs like OIL, investors have been given access to the futures markets directly and immediately. This has helped swamp out whatever legitimate hedge interests there were left in the oil futures game and made the prices that we see represented unreliable and fundamentally inaccurate.
This week's risk aversion, dollar strength and flight to Treasuries has seen oil plummet, as investor interest quickly scatters.
Commodity Futures Trading Commission rumblings about crackdowns on "speculation" (a dirty word that doesn't really apply here) have investors heading for the exits on oil even more quickly.
Margin increases and position limits are nice ideas and simple for the simpletons at the CFTC and in Washington to comprehend, but they will have little to no practical effect on the way that the market operates now.
The changes that the oil markets have made and the mechanisms they've now become took years to implement and ingrain. They will resist simple solutions and have the very real threat of doing much more harm than good. You simply cannot fix what took years to create overnight. It requires a lot more understanding and thought and intelligent conversation -- a lot to ask from both regulators in Washington and the politicians that inspire them.
Black box trade systems have flourished on the stock index/oil spread recently. Hedge fund managers in commodities and entirely oil-specific funds have seen rapid increases in their ability to accumulate capital, even as the hedge fund industry at large sputters.
Wealth managers continue to rebalance portfolios with new commodity indexes, designed to give clients exposure to oil as they try to hedge equity and fixed-income risk. A new generation of traders find the volatility of oil ETFs a great daytrade vehicle, as opposed to the relatively "slow moves" of stocks. We've seen a whole new infrastructure grow into the modern oil market.
It would be nice to think that this new decline in oil in finally representing fundamentals, and we'll be left with an oil price we can rely upon.
After all, natural gas -- an alternate fuel to crude - has been trading recently at under $3.50 an MmBtu. The last time we saw that price in nat gas, oil was trading closer to $30 a barrel.
At that price for oil, I'd be ready to recommend a whole host of stocks: Airlines like
; transporters that depend on fuel prices like
, and especially refiners like
, who've been buried under miserable margins by the endless bid on the crude barrel.
But I cannot resist the thought that oil is just taking a break, that if the stock market finds even a temporary bottom, if the dollar weakens a bit more again and if investors find some fresh appetite for risk, oil will surely head up.
We'll need a more reliable price for this critical commodity in order to recommend anything with some degree of confidence. But getting to a reliable price won't be easy, and Washington is the wrong place to look for the answers.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.