What I would like to reveal with these two charts, the Crude Oil market ($USDWTI) and the US Stock Market ($SPX500) using a 22-day chart (monthly) is the link between them and how we can utilize large drops in Crude Oil to help us to find support levels in the S&P500 Index. In order to help us see crude oil inflation adjusted, I divided Crude by the CPI Index. You can see right away that Crude oil is less than it was back in 1984 and about in the middle of the range over the last 35 years.
Large declines in Crude Oil are shown by Yellow shaded boxes and by Green Triangles. I labeled the price peaks in crude oil, and transferred those to the S&P500 so you can see the dates are an exact match.
I then added Yellow Boxes to the right of the green boxes to extend the support level forward in time so you can see how the market finds support at the level where crude oil prices had fallen dramatically in the prior cycle.
What's the point here? Large drops in crude oil have the effect of increasing profits in the economy and act as a stimulus to encourage spending in the economy. Money that would have flowed out of the country to purchase oil from foreign countries instead gets spent again and again in a multiplier cycle to increase measured economic activity.
In the short run, crude oil often is seen as a coincident indicator revealing that there is enough strength in the economy, and thus stock prices, to support higher crude oil prices. It's a common refrain from media commentators and it has it's base in logic in the short run.
In the long run, large declines in crude oil are great for the stock market and large increases in the price of oil are a giant destroyer of stock market values.
Notice the 1999 to 2008 run up in Oil prices which coincided with the giant bubble in real estate prices and its subsequent decline which decimated the banking system and people's faith in the financial system. Do you see how it also makes sense that as oil prices increased, it damaged the profitability of companies and of the economy as a whole? As the price of oil increased, we needed to devote an ever increasing quantity of time and resources to find more oil to feed the economy, which by its mere nature, is unproductive. It's as if you had to spend your entire evening cutting up wood outside so you could stay warm "inside your house" so you can get real work done.
Cash flowed out of the US to foreign nations to secure energy and less was available for the local economy. Also, investors lined up resources to grow the energy supply, which also took capital away from other projects. Bankers love to finance a sure thing like oil.
Let's look again at 2016 when oil prices collapsed down to $24 a barrel in February that year. There was near panic as it was feared that the banks that invested in oil related projects would default and go bankrupt. But you can also see that was a FERTILE TIME to buy stocks since the drop in oil was an economic boost to free up consumer spending and drive activity up, up, up. Later in 2016 there was a little thing that happened too, the Presidential Election and the hopes that tax rates would be cut. That's similar to another time and is the subject of another chart I posted over two years ago here.
The last point to make is that I overlayed the 1986 plunge in oil prices with the plunge in 2008-2009 and I couldn't help but notice how the action after that plunge has repeated itself so far to date. Time will tell, but there seems to be another long drop in the price of crude ahead.
If the price of crude gets too high, out comes supply and knocks it down. If the price gets too low, we use it up and drive the economy and then we end up using it too fast. It's an old cycle and it will continue forever.
Cheers.
Tim West
11/14/2019. 11:03PM EST
Large declines in Crude Oil are shown by Yellow shaded boxes and by Green Triangles. I labeled the price peaks in crude oil, and transferred those to the S&P500 so you can see the dates are an exact match.
I then added Yellow Boxes to the right of the green boxes to extend the support level forward in time so you can see how the market finds support at the level where crude oil prices had fallen dramatically in the prior cycle.
What's the point here? Large drops in crude oil have the effect of increasing profits in the economy and act as a stimulus to encourage spending in the economy. Money that would have flowed out of the country to purchase oil from foreign countries instead gets spent again and again in a multiplier cycle to increase measured economic activity.
In the short run, crude oil often is seen as a coincident indicator revealing that there is enough strength in the economy, and thus stock prices, to support higher crude oil prices. It's a common refrain from media commentators and it has it's base in logic in the short run.
In the long run, large declines in crude oil are great for the stock market and large increases in the price of oil are a giant destroyer of stock market values.
Notice the 1999 to 2008 run up in Oil prices which coincided with the giant bubble in real estate prices and its subsequent decline which decimated the banking system and people's faith in the financial system. Do you see how it also makes sense that as oil prices increased, it damaged the profitability of companies and of the economy as a whole? As the price of oil increased, we needed to devote an ever increasing quantity of time and resources to find more oil to feed the economy, which by its mere nature, is unproductive. It's as if you had to spend your entire evening cutting up wood outside so you could stay warm "inside your house" so you can get real work done.
Cash flowed out of the US to foreign nations to secure energy and less was available for the local economy. Also, investors lined up resources to grow the energy supply, which also took capital away from other projects. Bankers love to finance a sure thing like oil.
Let's look again at 2016 when oil prices collapsed down to $24 a barrel in February that year. There was near panic as it was feared that the banks that invested in oil related projects would default and go bankrupt. But you can also see that was a FERTILE TIME to buy stocks since the drop in oil was an economic boost to free up consumer spending and drive activity up, up, up. Later in 2016 there was a little thing that happened too, the Presidential Election and the hopes that tax rates would be cut. That's similar to another time and is the subject of another chart I posted over two years ago here.
The last point to make is that I overlayed the 1986 plunge in oil prices with the plunge in 2008-2009 and I couldn't help but notice how the action after that plunge has repeated itself so far to date. Time will tell, but there seems to be another long drop in the price of crude ahead.
If the price of crude gets too high, out comes supply and knocks it down. If the price gets too low, we use it up and drive the economy and then we end up using it too fast. It's an old cycle and it will continue forever.
Cheers.
Tim West
11/14/2019. 11:03PM EST
Comment:
Now that it has been nearly a year since this forecast for a large drop in the price of crude oil came to pass, we are entering the stage where we should look for a rise in crude oil. The news today about the Pfizer vaccine for Covid19 might just be the spark that ignites the reality that an economic recovery would lead to a lasting and large rise in the price of oil. Stay tuned... The pattern is there in that people expect the price of oil to stay low and are addicted to low oil prices. Also it would be logical too for oil producers to find a way to get prices back up. How can they do that? Study the last cycle and see if we can find a pattern there. My best guess is a vaccine should lead to a doubling of oil prices over the next 12 months. For now, invest in deep freezers that can store the vaccine and freezer trucks to deliver the vaccine all across the US and the world.
Comment:
I added the latest collapse in oil prices from the Covid crisis
I added the latest collapse in oil prices from the Covid crisis
Comment:
You can see that crude oil ISN'T much above the peaks in crude oil over the last 40 years. Everyone is talking about it because the price ramped up so quickly and the news was so frightening. Watching WW3 start by Putin and the crushing destruction to property and lives for no obvious reason is maddening to the world. Crude oil was insanely cheap from the Gov't lockdowns as demand dried up. Now we see that Putin might have been upset from losing so much cash flow over the last 5-6 years as the "uptrend in crude oil from 1999 to 2015" seemed to end. Losing substantial amounts of money can make a normal person go mad. To continue the pattern from the 1985 collapse in oil prices which has mimicked the decline from 2008, and likely the price of oil will hit new all-time highs (adjusted for inflation) over the next 5-6 years. Stay tuned. Tim West. March 15, 2022 8:31AM EST
Comment:
Updated chart to include more forecasted price action to extend to the top in 2008, which gives upside of 200% or so to crude oil from here on September 22, 2022.
Updated chart to include more forecasted price action to extend to the top in 2008, which gives upside of 200% or so to crude oil from here on September 22, 2022.
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So for the near term, we are dealing with the impact of the value of existing oil inventory and strongly declining demand for oil with the global economic reaction to the CoronaVirus. Let's stay closely tuned to the market's reaction to news and the OPEC/Saudi Arabia/Russia oil over-production mess.
I'll be in the Key Hidden Levels chat room each day.
Tim 3/10/2020 9:15AM EST