Today we have a very simple idea. When to invest in S&P 500 vs Oil.
The white centerline is the center of the logarithmic price distribution. The red line at the top is +2 standard deviations: unlikely events in favor of Oil will put the price here. The green line is the opposite, -2 standard deviations: unlikely events in favor of the S&P will put the price here.
In general, oil has gotten cheaper over the last 125 years compared to the S&P, hence the overall downtrend.
I've put some historical events in the chart to portray what might have "caused" the shift, however it's important to note that correlation is not causation, and there are MANY other factors at play here in addition to the events I've listed. There are many events that we must assume we don't know about that have took place. We simply want to observe the results. Besides, the chart doesn't have nearly enough room to post about all events which could have been related :p.
Let's look at the percentage increases in the chart that took place when the price breached the green line, in order to set some future expectations:
Oil vs S&P price increase based on HLC3 candles (average of high, low, close): 1917 to 1921: 760% 1929 to 1949: 480% 1969 to 1980: 1380% 1999 to 2008: 1070% 2020 to now : 420%
If you look at these percentages increases, one might conclude that we might be near the top. However, we breached far below the -2 stdev line, and momentum has reversed sharply. Not only that, upward momentum in this area tends to carry us PAST the centerline (white line) historically speaking. So, expecting this to be the top is quite generous, especially if you consider that the price of oil was below 0 for the first time ever in 2020! In my opinion, it's not crazy to think we could go 3-4x from here, to 0.75 or greater, especially if you consider that OPEC has no plans to increase production, which produces some of the cheapest oil on Earth.
This chart only covers events like today, where we are recovering from a -3 stdev event, and does not cover the inverse scenario of where the S&P recovers. I feel like that deserves a whole other chart as I didn't want to make it look too crowded.
Thanks for taking a look and don't forget to hedge your bets!
OPEC has no plans to increase production until it's in their interest to do so! The saudis are beginning to sell oil for chinese renmimbis and beginning to shrug off requests from the biden administration itself
fringe_chartist
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@lollerfirst, yeah, I think this is defintely the best long-term course of action for the Saudi authorities. They could ramp up production inefficiently short-term. But they have practically the cheapest oil in the world as far as extraction costs go, so it doesn't make sense. Basically they could either:
1) Give up their advantage of huge reserves and extremely cheap extraction by ramping up production and pushing the price down short-term. 2) Keep their advantage by doing nothing and sell the oil at a premium due to globally increased demand and decreased supply.
Either way, they will inevitably run out of oil, so it makes sense to go the long-term route and make the most money. Also, the long-term route requires the least amount of effort. Why put in more effort for a worse result for themselves? People will complain that they "hoard" and "control" the oil supply, but that's a narrative that is underlined by intentional lack of production/discovery by the rest of the world.
So, we can expect BRENT to keep its long-term uptrend, right? But, how about EVs. I mean, as far as I know, one of the biggest oil consumer, China has the most EVs. Doesn't it affect to the oil price? Also, Germany is restricting gas cars by 2030? Also, SPN500 is now in a global short (as far as I know). What do you think about SPN500?