Stocktake: Should investors fear rising oil price?

Dove-like Fed, Musk meltdown and bulls have the edge

Oil prices have risen some 50 per cent over the last year – the 11th biggest price spike in the last 70 years. Photograph: Lewis Whyld/PA Wire

Oil prices have risen some 50 per cent over the last year – the 11th biggest price spike in the last 70 years. Photograph: Lewis Whyld/PA Wire

 

Surging oil prices are attracting the attention of investors, with UBS the latest bank to debate what a $100 oil price would mean for the global economy. Like Merrill Lynch, which recently warned of a “risk of $100” by 2019 or earlier, UBS is concerned. Oil prices recently hit $80 and have risen some 50 per cent over the last year – the 11th biggest price spike in the last 70 years, says UBS, and higher than the “sweet spot” ($50-$70) for the global economy. Oil spikes have been, as Merrill put it, a “traditional business-cycle killer”, but there’s no reason to hit the panic button just yet. Adjusted for inflation, oil prices are below levels seen for much of the 2005-15 period, with UBS noting that an $80 oil price means “something very different than it did for our parents”.

Secondly, UBS estimates a $100 price would reduce global economic growth from 4 to 3.84 per cent in 2019 – pretty mild stuff.

Thirdly, headlines about one of the biggest oil spikes in 70 years are a little hyperbolic: the 10 spikes that exceeded the current one have all taken place since the 1970s, with six occurring since the dawn of the millennium. Volatile oil prices have long made forecasters look foolish. Oil has doubled six times since 1987 and has halved on several occasions, notes Calculated Risk blogger Bill McBride. Last June, when oil fell into a bear market, Stocktake warned it was “not productive to greet perfectly normal price gyrations as apocalyptic”, with oil likely to “be back in bull market territory sooner rather than later”.

It’s worth remembering that, when it comes to oil, abnormal price gyrations are perfectly normal.

Markets cheer dovish Fed statement

Federal Reserve

By saying it was prepared to accept a “temporary period of inflation modestly above 2 per cent”, the Fed made clear it would prefer a slight inflationary overshoot to any action that might choke off the economic recovery.

Ten-year bond yields retreated back below the much-watched 3 per cent level; perhaps more crucially, given the endless focus on the possibility of the yield curve inverting, two-year yields reversed sharply lower. Bearish strategist Peter Boockvar warned recently that Fed tightening would deliver a “punch in the face” to ill-prepared equity investors. That punch seems to have been delayed, as the Fed continues to take a “slowly does it” approach.

Another Elon Musk meltdown

Tesla

Tesla doesn’t advertise, whereas “fossil fuel companies” and car companies “are among world’s biggest advertisers”. The solution, he suggested, is a Yelp-like website that would allow people rate to rate the credibility of journalists and media organisations. Conspiracist? hyper-sensitive? Musk rejected one journalist’s description of a “media-baiting Trump figure screaming irrationally about fake news”, but it’s telling Donald Trump Jr was busying agreeing (“so true!!!”) with the Tesla founder. Like Trump, you don’t know if Musk really means this stuff. Is he under such strain he believes this nonsense? Or is he, as Tesla short-seller Jim Chanos recently alleged, engaging in “theatrics” to distract investors? For Tesla investors, it’s hard to tell which option is more concerning.

Bulls edging market tug of war

Bespoke Investment
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