Oil Market Has Fully Shed Terror Premium

Steve Kanaval  |

If you look at Oil prices back into the 90's you will see Crude prices were in the $20 per barrel range. It was a time where managers could buy 30 year treasury bonds as a flight to quality (popular at that time) or buy over priced Put Premium in Equities (which was driven higher by the Stock Market crash of 1987) and it was long before the explosive move in Gold prices. But once the 30 year treasury disappeared Oil became the choice of managers for flight to quality sending prices higher for 2 decades. It seems finally in 2016 Oil has shed the terror premium fully.

The vehicle most investors use to bet on energy prices the widely held Energy Select SPDR exchange-traded fund is down 43% from its June 2014 peak, it fetched a similar price as recently as October 2011 and is some 50% above its recession low. In other words, a steep loss, but hardly panic territory.

Analysts at Deutsche Bank estimate that North American exploration-and-production stocks now factor in a long-term oil price of under $65 a barrel. That is low relative to the $110 hit 18 months ago, but that was in a world of seemingly insatiable emerging-market demand. Today, that is in doubt, particularly when it comes to China.

Energy stocks probably present an attractive buying opportunity since the average Brent crude price of the past decade was a little above $80 a barrel. But those with the willingness, and ability, to hang on to realize a profit must be aware that we are a long way from there—and perhaps even a good distance from the bottom.

I think we are all connected to oil prices each time we fill up at the pump and seeing $1.70 per gallon pricing allows us to spend money on other things and many believe this filters right to rising healthcare costs. But those who travel know the airports and restaurants are as busy as ever. There is not a consumer recession - QE 2,3 and 4 took care of that, but China remains the lynchpin for Global stability, and you have constant tweaking of the Yuan roiling markets on a regular basis. What we do not need is a repeat of August where markets declined 12% in the blink of an eye.

Either way it is an end to an era...oil is no longer carrying a terror premium. It is now centered on gun stocks.

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