Tuesday, May 15, 2012

Crude Oil & Stock Prices

The price of a barrel of Brent crude is likely to fall to $100 soon. It is at $111 this morning, down from a recent peak of $128 on March 9. On Sunday, Ali al-Naimi, Saudi Arabia’s Oil Minister, said he wants an oil price of around $100 a barrel and would like to see global inventories rise before demand picks up in the second half of the year. He said that his country is working at bringing Brent crude prices to that level by pumping 10.1 million bpd in April, its highest in more than 30 years.

On Friday, the International Energy Agency said that oil prices are likely to stay high, despite the dramatic improvement in world supply and a big build in stocks, due to the tensions between Iran and the West. It seems to me that those tensions are diminishing because all that oil is more than replacing Iran’s exports, which have been reduced by the surprisingly effective sanctions. The Saudis are just as anxious to shut down Iran’s nuclear program as the Israelis.

Could the price of Brent fall below $100? It could if Europe’s recession worsens and depresses global economic growth. More likely is that world crude oil demand will continue to rise and that the Saudis will cut their production to peg the price around $100. World crude oil demand rose to a record high of 89.5mbd over the past 12 months through April. Demand in the Old World (the US, Western Europe, and Japan) has been relatively flat around 38mbd, while demand in the New World (everywhere else) rose to a record high of 51.7mbd in April.

I continue to monitor the CRB raw industrials spot price index daily as a very good indicator of global economic activity. This index does not include petroleum products, and gives a clearer signal about the state of the global economy than the price of oil. Nevertheless, they are highly correlated. I combine them to derive a Global Boom Bust Barometer. It’s been falling recently, led by the decline in the oil price, but remains above last year's low. The S&P 500 is highly correlated with both the price of oil and the Global Boom Bust Barometer.

Today's Morning Briefing: Fully Invested Bears (1) Lots of bearish headlines in this bull market. (2) Don’t fight the central banks. (3) The bulls are flinching again. (4) The end of the road for kicking the Greek's can. (5) Would a “Grexit” be a catharsis? (6) US cruising toward fiscal cliff? (7) Republican trifecta scenario. (8) Dr. Copper is worried about China. (9) JP Morgan’s big loss. (10) A hedge fund disguised as a hedge? (11) Moody’s is chopping lots of banks. (12) Brent for $100? (More for subscribers.)

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