Oil Prices and Stock Prices

Yesterday we wrote about the link between oil prices and energy ETF's, including stocks that should be responding to long-term expectations, not the front-month spot prices.  There is a lot of "floating storage" right now.

There is an expiration effect, with a front-month imbalance.  Meanwhile, the effects drive down the prices of anything in the energy sector.

The Role of Speculation – a New Concept for Links Posting

Last night, 60 Minutes had a segment on oil prices, emphasizing speculation and the need for greater regulation.  There were some good points in the segment, but we found the overall impression to be quite misleading.

Regular readers know that we are big fans of those who are the gatekeepers of the Internet, and we feature the sites that do this well.

Here is a new idea:  How about pulling together links on a specific topic, providing the intelligent reader an opportunity to see a range of thought on the issue.  The articles do not always appear on the same day, the general format for the gatekeepers.

Let us give it a try.

Our own explanation about the over-emphasis on the front month.

Eddy Elfenbein's excellent take on what 60 minutes should have asked, but did not.  You can also see the complete video.

Barry Ritholtz analyzing what 60 minutes missed.

Todd Sullivan, looking at how actual supply and demand affected prices.

And most importantly, how a thoughtful economist, writing peer-reviewed work analyzes the role of markets and speculation in influencing prices.  This is not an easy read, because it is detailed and analytical, with plenty of charts.  It is quite clearly argued, and accessible to anyone willing to take the time.  Investors should follow the excellent work of Prof. James Hamilton here and here.  It shows the oil price influence on the recession, and what we should be watching.

Conclusion

It is always a challenge to look forward, but the information is there for those willing to make the effort.  The overall conclusion is that speculation is only part of the effect on prices, with a need to balance the various factors.  Our own view is that forward pricing is a good leading indicator.

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2 comments

  • anna c September 6, 2009  

    Moves by the CFTC to try and regulate the oil trading market and prevent the kind of speculation which has seen crude oil prices rise from $30 per barrel back towards $70+ this year took an interesting twist yesterday when it was announced that the weekly COT data would now include new details on the aggregate holdings of the big Wall Street dealers, hedge funds and other financial participants. COT data is a useful market sentiment tool but as many of the market participants both hedge and speculate it has become increasingly difficult to analyse. According to the CFTC the new format will be making its debut next Friday.

  • Jeff Miller September 10, 2009  

    anna – -Thanks for this alert. The new approach bears careful watching.
    Jeff