Friday, August 14, 2015

Crude Oil's Pulse

Typically when a stock is graded against the market for volatility and performance, traders compare percentage changes between that stock and the Dow Jones Industrial Average which represents a pulse if you will of the market. The Dow Jones index is up 0.28% points on a favorable day in the markets. Crude oil's WTI price is up around 0.20 as well with the news of the crumbling oil export ban sponsoring new trade with Mexico. Although the movements may not have a direct connection, market health can still play a crucial role in the fundamental side of crude oil price. In reviewing the financial crash of 2008, a tanking stock market had tremendous deflationary pressure on the WTI crude oil price. Demand projections dropped significantly in the aftermath of the crisis as well as consumption tapering off with consumers and businesses spending conservatively. With the recovery of the global financial system, WTI price stabilized at the previous higher price until it continued into the slump. Over the past three months, we've seen the further demise of the crude oil price as well as the volatile ride that the Dow Jones has followed due to short-term market cycles. Below are charts showing daily price changes with a 20-day simple moving average.

from WSJ

I've highlighted the charts with red and green zones to show general movements of the two stocks over the recent oil price drop. The DJIA has experienced a period of whipsaw movement that has the stock market reaching new highers then dropping to a floor that seems pretty well established and may perhaps even fall further. Meanwhile, the WTI price fell from a high of $60 to almost $40, an astounding month and a half loss. An extreme movement like this in a commodity can be converted as ripples in the overall market especially if that commodity is a major input for the typical business.Crude oil serves as an input for all fuel affecting any company that uses automobiles extensively, needs transportation over the sea or in the air, or any petroleum and energy service, a large sector of the overall stock exchange. Hence, we see the initial DJIA jump in July due to favorable earnings as costs across the market were increasingly cut. At the same time, oil companies showed losses and contributed to the decline later in the month. Therefore, the initial connection between the two tickers is through financials where WTI price increases and decreases create deflation and inflation in costs, revenue, and overall consumer prices. Another connection begins with movement from DJIA that translates to a potential reaction from WTO price. The black lines on the charts show corresponding periods of gains with large jumps in the DJIA and smaller blips in WTI. Here we see oil investors responding to the markets showing economics growth and possible demand increase. A long, solidified gain in the overall markets can translate to bigger crude gains, but short-term increases reveal speculative bumps in oil price. Nevertheless, a pessimistic outlook in both markets has kept prices down as of recently. Both DJIA and WTI remain closing below their 20-day simple moving average with no particular connection except for overall negative sentiment from traders in both markets. As the year comes to a close, oil investors must keep their eyes on the overall market health in order to predict possible trends in WTI crude oil price. The same could be said for the Dow Jones as the stabilization on energy prices is crucial for the smoothing out of economic projections as well as prospects for inflation and deflation

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