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Why: Oil Trades With Markets Unlike Weeks Ago



March 29, 2011 – Comments (0)

It was just three weeks ago when oil spiked higher, causing the market to sell sharply. As oil traded over $100 per barrel, the markets got jittery over fears it would crush a slowly recovering economy. Today, the markets are loving oil as they trade together, tick for tick. The SPDR S&P 500 ETF (NYSE:SPY) is trading at $131.51, +0.53 (+0.40%). This is the high of the day. The United States Oil Fund LP (NYSE:USO) is trading at $41.83, +0.41 (+0.99%). This is also the high of the day.  So what happened? Why is higher oil all of a sudden good for the markets?

The reasons are simple and easy to understand. The spike in oil from $90.00 to $107.00 was quick and painful. The markets are never good with sudden change. The markets like calm, slow and steady. Surprises and shocks keep investors on the sidelines or cause them to panic and sell. This was the initial run up in oil. In addition, this move higher was coupled with a dramatic, sudden destabilizing force in the Middle East. This again strikes at fear. Oil shooting higher caused traders to fear the oil shock would cause the economy to slow and a possible double dip could occur.

Emotion rules the markets in the short term. On one side there is greed, on the other fear. Oil stalled out after reaching $107 per barrel and fell back to $100.00. This allowed cooler heads to prevail. Fear over the Middle East began to subside and oil has now stabilized between $100.00 and $105.00. The panic and fear is now gone and Wall Street thinks oil at this level will not cause any major disruption in growth.

In addition, not only is the fear gone but profits may actually benefit from higher oil at some companies. Assuming oil demand does not falter much, companies like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) make more money from higher energy prices. While this may not seem like a big deal, these two stocks, along with many others are key components of the Dow Jones Industrial Average and S&P 500. If they have a major weighting in those indexes and their profits are soaring, those indexes will also get a solid boost.

While the market enjoys the calm in the eye of the storm, Wall Street and all traders must remain cautious. Ultimately, higher oil is coming whether because of a weak Dollar or global demand on shrinking supplies. Yes, the markets seem OK with oil between $100.00 and $105.00 per barrel but it is unlikely to remain there long. Any sharp spike higher may send another shock through the markets causing a quick decline.

Gareth Soloway

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