Will The Oil Price be the Precursor to a New Bull Market?


Source: National Bank

The signs that we could be coming to the end of this downturn in both stocks and bonds, are starting to appear. It is important to note that capital markets tend to anticipate economic trends, reacting to signals approximately six months before the events are experienced.

  • The first sign is the over-abundance of doom and gloom in the market.
  • The second is that much of the unwelcome news has already been priced into the market.
    • Keep in mind that many stocks saw their prices peak over a year ago and even more peaked just prior to the end of 2021. We are already six to twelve months into this downturn.
    • We will also note that the extended valuation levels, which had us concerned at the end of 2021, have mostly normalized.
  • Thirdly, there are signs that the global economy is already weakening, and this is seen in the chart above that shows that demand for oil has slipped below existing supply.
    • This third point is critical as most of the doom and gloom is based on the concept of stagflation. The market believes that the global economy is weak while inflation is entrenched and worsening.

One of the key components to the latest inflation surge has been the price of oil, which rocketed from $61.50/bbl to a peak of $129.00/bbl in a mere 100 days. The price retraced from that reactionary peak and has since traded in the range of $100-$115 per barrel. If one goes back another year, the oil price was at $33.50/bbl in November of 2020, when supply and demand had collapsed due to the pandemic.

Oil is a principal factor of production, since it is used throughout the production cycle of almost all goods including agriculture, which is the other key ingredient to our high inflation numbers of today.

It is important to have an accurate definition of inflation. Inflation is not about the level of prices, but the change in prices. For inflation to maintain its current level, oil would have to rise by another 100% over the next twelve months and we do not see the price of oil exceeding $200/bbl. In fact, with the current level of demand below supply, we would rather expect the oil price to drop over that time.

The naysayers will take issue with this position and point out that as China opens its economy, demand will rise, but there is also the potential for added supply from the U.S. and OPEC countries which are not currently producing at peak capacity. If, as we suspect, we have seen the oil price peak for this cycle, inflation must moderate and there will be an increasing sense that the central banks of the world are tightening into a recession.

This shift in perspective would mean that central banks either do not raise interest rates as much as anticipated or, if this plays out longer, having raised rates, are forced to reduce them. This shift in expectations would then reduce the pressure on both bond and equity markets.

This does not mean that the bearish sentiment or the “doom and gloom” reporting will end just yet, but “it’s always darkest just before the dawn” and that is when buyers are offered the best opportunities. We are currently watching this shift in the oil price dynamics closely, for if it holds, we may currently be moving through the darkest hour with a bright future ahead.

Disclaimer:  Please note that the publication is designed to provide general information only. It reflects the thoughts and opinions of Logan Wealth Management and should not be construed as financial advice, nor should the information be considered a substitute for personal advice. Information used in this publication has been gathered from sources believed to be reliable. Logan Wealth Management is not responsible for and assumes no liabilities or responsibility for any loss or damages suffered as a result of the use or misuse of, or reliance on the information or content of this publication. Please consult your financial adviser to determine whether the information is applicable to your personal situation.