Stock Market Predicting an Oil Price Crash

As oil prices jump to record highs, something strange is happening: the stock prices of major oil companies like ExxonMobil (XOM) are no longer following. Why not? Either because the market is stupid…or because it’s smart. Floyd Norris at the NYT has his money (figuratively) on the latter:

For most of the run-up in oil prices, the stocks of the oil companies have moved right along. But lately, that has not been the case.

The divergence came after June 4, a day when oil prices fell to $122.30, and the Amex Oil Index (a group of oil stocks) also fell sharply. As I write this, the oil price is up to $137.90, a rise of nearly 13 per cent. Oil stocks are up less than 1 per cent.

Today, the oil price is up more than 2 per cent, and oil stocks are down almost 1 per cent.

It may be that the stock market is growing worried that high oil prices contain the seeds of their own destruction.

“At some point, it is likely to dawn on people who own oil shares that rising oil prices are raising global recession risks, and that a global recession would be really bad for oil companies,” said Robert Barbera, the chief economist of ITG.

It could also be that the market is assuming that Congress will pass its ludicrous windfall tax, or that alternative energy development will soon make it worthless. But these seem less persuasive.

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