With oil and materials names now accounting for over 25% of the S&P 500 it is imperative that you understand where the price of oil is heading as these stocks are likely to correlate closely. Bloomberg reports that oil prices have surged over 60% this year, but could be facing a wall at $80 per barrel as spare capacity spikes.
“The numbers have gotten much larger over the past year,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The Saudis alone probably have close to 3 million barrels excess capacity. The excess shows how effective OPEC’s been in managing the market. The Saudis are happy with oil in the $70-to-$80 range,” Mueller said. “It’s low enough to stop development of some oil sands and alternative energy sources while not hurting the economy. If prices rose above $75 they would open the spigot.”
Sounds like OPEC wants oil prices in the $75-$80 range. This could hinder the recent run-up in stocks. If seasonality, a weak hurricane season or economic concerns influence the picture don’t be surprised if oil trades much lower and takes the stock market with it….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.