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Oil and stocks

Posted by: Ben Steverman on May 13, 2008

Rising energy prices are stressing out U.S. commuters and businesses, and that can’t help but concern Wall Street, too.
But as I wrote here, the relationship between the price of oil and the price of stocks is anything but simple. Oil hit another record today but stocks barely budged.
Below are three more observations about oil and stocks. I’d love to here your thoughts:
1. If you’re looking for evidence oil’s surge is the result of a speculative bubble, look at the astronomical trading statistics on energy exchanges. Bill Stone, PNC’s chief investment strategist, notes today that the average daily trading volume in energy futures so far this year is $138.3 billion. That’s a 61.6% increase from 2007 and a 3,000% increase from 1997.
I would note that much of this increase might be the result of technology rather than evidence of a bubble: Sophisticated computerized trading systems make it much easier to try to squeeze out extra profits by buying and selling contracts rapidly throughout the day.
2. Are worries about an oil bubble scaring short sellers away from stocks? This is hard to prove, but it seems plausible.
If the price of oil collapses suddenly, that could give stocks a big boost, particularly consumer companies. The only caveat: For that collapse to help stocks, it must be the result of a speculative bubble bursting, not the result of a slowdown in global economic growth. A global depression would hurt demand for oil and cause prices to drop, but nobody wants that to happen.
3. No one really knows where oil prices are going. S&P’s MarketScope quoted one trader saying: “There is a strong uptrend in this market and prices won’t come down until that trend is broken.” Gee, thanks. In other words, prices will go up until they stop going up. I’m not sure how helpful technical analysis is at a time like this.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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