Monday, 5 October 2015

Oil and Equity Correlation

INTRODUCTION:

  • Goldman Sachs says "OIL PRICE COULD CRASH TO $20"...IS IT PROBABLE?
  • Ambit Capital says "SENSEX CRASH TO 22,000 CAN'T BE RULED OUT".... IS IT PROBABLE?
  • ARE THE ABOVE TWO FORECASTS LINKED?




§ PART A: OIL AND EQUITY CORRELATION §


$INDU versus $BRENT in April 2015:



$INDU versus $BRENT in October 2015:



Dow Jones dips soon after Brent dips...

And now a look at $BRENT OIL superimposed on $SENSEX and $NIFTY, weekly prices....from 1996 to 2015.



Looks like there's a correlation...

Which takes me to the work of Tom Therramus.

"In an analysis published in 2009, Therramus pointed out......a broader pattern in which nearly every stock market crash and recession of the preceding 50 years had occurred shortly after a large and abrupt change in the price of oil."


§ PART B: OIL OVER SUPPLY §


OIL IS OVERSUPPLIED. PEAKING SUPPLY, AND NO SCOPE OF PRODUCTION CUTS. CAN THE CURRENT PRICE LEVEL ($49) SUSTAIN ITSELF?

image © Bloomberg


Iran vowing to increase oil output by 1 million barrels a day after sanctions are lifted is really not going to help the oil price, nor is the Russian decision to not cut production. The Saudi oil minister does not want to cut production either, no matter what. And so many other reasons, that I covered in my blog entry RIP Oil Price.

And Goldman Sachs is saying that the risk of oil price slipping to $20 is high.

Further, Therramus writes:
"The simplest explanation for the slump in oil prices is it falls in line with an established multi-year pattern that is being driven by supply and demand. The oil crash of 2014 was the most recent manifestation of a tidal ebb and flow in oil price volatility that has occurred every three years or so since at least the mid 2000s.

If one accepts that we are seeing the fourth confirmatory spike in a long-term pattern of oil price volatility, what is causing it and what can be expected next?"


IN VIEW OF THE ABOVE DATA AND MY PREVIOUS BLOG ENTRY RIP OIL PRICE, OIL SLIPPING TO $20 IS PROBABLE, AND WILL MOST PROBABLY MAKE EQUITY MARKETS FALL ALONG WITH IT.

EQUITY MARKETS ARE MOSTLY OVERVALUED ANYWAY, IF SEEN FROM THE P/E RATIO POINT OF VIEW.


§§

Further reading:

1. Tom Therramus: Will collapse in oil price cause stock market volatility?

2. Ambit Capital: Sensex@22,000

3. Therramus: Oil caused recession, not wall street

4. Vladimir Putin won't cut production..


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