Stop Looking at Oil By: Gabriel PotterMBA, AIFA® 2019.08.12

Today’s blog post is really a message I’d like to convey to the market and economic data analysts at CNBC, Bloomberg, Reuters, and everyone else:  stop looking at oil!  The price of oil is not a good barometer for market conditions.

I understand the argument why oil price should be a good proxy for the health of the economy.  Energy is a raw material for just about every good and service.  When more goods are being produced, more energy is consumed, and oil prices should rise.  Conversely, when production and commerce slows, less energy is required and oil prices fall.  I get the idea.

Imagine this: I’ll turn on CNBC and see market analysts talking over the “Breaking News” placard, with bold red text telling me Brent Crude futures and West Texas Intermediate are falling 2% during the high-traffic, summer driving season.  The expressions of the talking heads and the urgency in the TV production graphics are trying to convince me that something substantial and important is happening in the price of oil.

Here’s the problem: it won’t.  Not for a while anyway.  More accurately, it hasn’t thus far and the conditions don’t suggest the price of oil can move too much for the near future.  Why should this be?  In a word, hydrofracking.  More specifically, the marginal cost of oil production for hydrofracking drilling operations is between $40 and $80 per barrel of oil, depending on the site.  (We wrote about this in a blog post back in 2014 - http://westminster-consulting.com/Media/Blog/the-price-ceiling-on-oil)   Since 2015, oil has mostly stayed above $40 (but for a few months in early 2016, when it briefly touched $30).  Moreover, despite the elevated rates of growth in the US over the past few years, the price ceiling on oil has held firm at $80. 

It just doesn’t make sense to use a range-bound commodity as a barometer of market conditions.  We live in a world where we can see intra-quarter growth rates over 4% (Q2-2018) and now experience worries over an escalating trade-war and possible global recession, but the price of oil has been relatively steady – especially considering how volatile it was in the 2006-2008 era.  So, to our peers in the media, please focus on something else.  The price of oil will probably not be the best metric for broader economic conditions. 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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