There’s been too much cacophony about the Libya unrest. Rather than be beholden to the sensationalist financial media and just fear monger over Oil prices, it’s a better idea to have some proper guidance as to where we are, and how bad it could get.
First the facts – Libya is the 18th largest oil producer (1.8mm barrels) and the 10th largest exporter (1.4mm barrels). It has lost 20-30 per cent of its production capacity for the moment, according to differing reports, but this blip pushed Oil prices up to $93.57 on Tuesday, 9% up, and the highest since October 2008.
My advice to investors + advisors – Don’t compare this to $140 Oil in summer of 2008. That was a bubble during an economic boom. This is Middle East turmoil related price spiking during a weak recovery. Make no mistake. Anybody that compares what’s happening now to the mid 2008 highs, stop listening. Those worth their salt will look for comparisons to the Iranian revolution in 1980 or the 1973 Oil embargo, or even the Gulf War. Looking at an Oil chart from HiddenLevers, you can see prices jumped from just under $16 in April 1979 to a peak of $39.50 in April 1980, a gain of 150%. The Gulf War Oil price shock was milder, going from $21 in July 1990 to $46 that October, about double. So that gives you our ceiling. But the character of Oil’s movement is different in this scenario than those times. The Egypt unrest started in late January, when Oil was about $91.60. It moved south subsequently, and even with the pop this week, we are at the same price on Oil as we were before it was an issue. Also, the S&P has kept pace with Oil prices since Spring of 2009, until the volatility started. Check out this comparison:
Oil has been choppy, and is now just getting back to correlation territory. Comparing Oil and the S&P, it’s easy to see that S&P had totally outstripped Oil in February, and this Libya news puts the two back in alignment. So for right now, fear based on this move in Oil is overblown. You can complain about inflation or quantitative easing to say Oil prices and the S&P are too inflated. But you can’t enjoy your S&P gains and expect Oil to be down. They’ve been travelling together, and Oil has yet to outpace the gains in the market. Where does the price of Oil start to hurt the recovery? The WSJ says $127. Keeping Libya in a box (read: No Saudi contagion), I can’t see Oil going too far into triple digits, worst case.
DISCLOSURE: no positions held.