Market Update: Oil Prices- The "Other" Market Story
A Look On the Bright Side
For the first time, Michigan has begun to report the total number of recovered COVID-19 Patients:
Washington and Oregon report a decline in new COVID-19 cases for the 4th consecutive day:https://thehill.com/homenews/state-watch/491898-washington-oregon-show-promising-coronavirus-trends
Market Update: Oil Prices - The "Other" Market Story
While the world has been gripped with news of the Coronavirus pandemic, another huge economic story has been unfolding. Due to an escalating oil price war between Russia and Saudi Arabia, the price of oil has collapsed. This year alone oil has plunged from nearly $70 a barrel to as low as $19!
As the Saudi’s engage in an oil price war with Russia the ramifications are felt throughout the U.S. energy industry. In fact the collapse of oil prices is crippling to U.S. energy producers. Many of the oil fields that have come online in recent years had budgeted for oil to be in the $55-$65 a barrel range. The cost of producing a barrel of oil in many of the U.S. and Canadian fields is over $35 a barrel. With oil now hovering in the mid to low $20’s per barrel these producers are hemorrhaging money.
I’m not a geopolitical expert. But I do know that, despite a horrendous and tremendously blemished human rights track record, Saudi Arabia is supposed to be our ally. Despite the supposed allegiance between the Saudi’s and the U.S. they seem content to put our energy companies out of business. This is a vital industry for America in terms of energy independence, jobs, and a power check against OPEC.
We know that COVID-19 and the ongoing economic shutdowns will have a material impact on the economy and therefore the market has responded negatively to that news. What is unclear is how much the ongoing oil price war has impacted the market.
As you can see from the chart below the downward move in the S&P 500 this year has coincided with the downward moves in oil prices.
To be clear I’m not saying the cause of this bear market is the collapse in oil prices it should be obvious to everyone that COVID-19 is the real culprit, however, it is quite possible that the collapse in oil has made this correction worse than it otherwise would have been.
Continued Signs Of Optimism
In our market update last week (released April 3rd) we talked about how there are often market rallies throughout the course of bear markets. At the time of our writing, we were experiencing a pretty substantial rally and that rally has continued.
As you can see from the chart below since March 23rd markets have rallied substantially. The chart includes U.S Large and Small Cap stocks, International Developed Stocks, Emerging Market Stocks, and even Bonds joined the party.
We know that markets are forward-looking. They are often trying to interpret where the economy will be 3 months, 6 months, and even years from now. Clearly, from recent performance, the market believes we will get past this and the economy will return with a flurry of demand and spending.
Is the market right?
I certainly hope so but I cannot know for sure. To be fair, none of us know how quickly we will be able to get this virus under control and get the economic engine firing again. Assuming the market is correct and normalcy commences near the end of the month there will still likely be many bumps in the road. As the economic data is released in months ahead there will be negative and positive surprises that send markets rolling. Ideally, however, we do not retest the lows of March 23rd!
As the week’s tick by we will be paying particular attention to the price of oil, the spread and containment of COVID, and unfortunately the rate of unemployment claims. The last two weeks have been truly staggering numbers (2.92 Million and 5.824 Million). These two numbers shatter all previous records by an appalling amount. We knew this would likely happen but it is still disheartening to see.
History has been made this year in terms of the unprecedented steps governments have taken to stop the spread of COVID and the speed at which the market has crashed. We will continue to look at the economic data for signs that history can be made once again this year with the fastest market recovery in history!
As always the entire FSG team is here to serve you.
View related content at the links below:
https://fsgmichigan.com/blog/2020-first-quarter-market-update
https://fsgmichigan.com/blog/the-coronavirus-aid-relief-and-economic-security-act-cares-act
https://fsgmichigan.com/blog/market-update-march-27-2020
https://fsgmichigan.com/blog/what-is-my-advisor-doing-during-a-bear-market
https://fsgmichigan.com/blog/the-dos-and-donts-during-market-volatility
https://fsgmichigan.com/blog/the-anatomy-of-a-stock-market-crash
https://fsgmichigan.com/blog/coronavirus-chaos-thank-you-for-your-confidence
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Written By Brice Carter