Stupid question about Oil

I am probably being silly, but why do equities have to broadly sell off if crude oil prices fall? It’s pretty clear why some equities, like energy stocks, might decrease in price. However, aren’t most companies price takers in energy? Wouldn’t the decline in Exxon Mobil be offset by increases in Walmart, airlines, car manufacturers, and everyone else? Furthermore, if consumers spend less on oil, wouldn’t they buy more other things and boost other companies due to the substitution effect?

Or does the price decline in equities just reflect uncertainty, that is, a benefit to other equities would need time to settle into the market?

I feel that there is something that I am missing.

Like I’ve said in the oil thread, if oil is really at a $5x handle, the world is in a recession. So equities move to reflect that. There is, of course, a very real possibility that this is a short term speculative move in oil, but $50 oil and a bull run in industrial/consumer energy demand are not compatible. If industrial output and consumer spending is increasing, then oil demand is increasing, and prices are increasing.

Well I’m a believer in the whole we don’t really know what moves the markets, people just make up things that sound good. But I know Nassim Taleb isn’t well liked on this board.

So if we are to assume the sell off is due to crude, I think it’s probably a function of the reason why. The narrative is that the rest of the world is slowing or entering another recession, with GDP forecasts being knocked down. As a result, anyone who has significant revenues from these countries will likely be negatively impacted. But. . . I don’t know the S&P 500 breakdown of revenue by domestic/foreign. Essentially, low oil prices is not indicative of booming economic times.

Also the dollar is strenghtening. I really don’t understand forex theories too well, but that may be something else.

The energy sector makes up a large component of the S&P 500 and many financial institutions invest heavily in this sector too. a fall in a sector is going to of course effect the energy sector, but also the financial sector too. This may be negated with improved margins for some transportation and shipping areas but not nearly enough to offset the losses experienced else where. Furthermore, though consumers may benefit from lower costs of production, and gas prices, they their portfolios will decline affecting their spending habits. lower spending and confidence will decrease consumption, and thus everything gets hit. Finally, dont neglect the jobs lossed with domestic companies, whether it be direct from refinaries, to investment in alternative energy sources since the impetus is no longer their. I need to eat so this is a half -assed statement, but should answer your question at least from a top level perspective.

Yeah, the latest oil price declines have come from downward demand estimate revisions so its more of a reflection of the state of the global economy than simply OPEC working the supply.

In the long term low oil is great for the world economy as it will eventually cause a capital reallocation from energy sourcing (which doesn’t boost growth or productivity) to other more innovative fields and function like a consumer stimulus. But making the shift abruptly comes with major frictional costs like defaults among the high yeild and small cap sectors, negative impacts to the rails, airplane manufacturers that have invested in fuel efficient tech, mining equipment suppliers, and USGC petro-chemical suppliers that have traditionally benefitted from the cost spread in thermal parity between LNG and petro based crackers. Because these frictional costs are hitting at a time when the global macro economy is a bit precarious, the equity market volatility reflects the uncertainty bridging the gap between now, over the frictional transition, and into the more positive long term outlook.


Pay no attention to the noise Ohai. It’s spurious correlation. The talking heads on TV try to make sense out of it in order to appear intelligent and saavy. No one knows why oil goes down, and then equities go down.

Given energy is an input for, all businesses, I’m shocked there is not more of a inverse relation between oil and equity prices. Stranger things in the market have happened.

^lol, really?

For the US:

US Energy sector has been a major driver of growth in the indexes. Now we’re facing major defaults in a young sector that may have expanded too fast with too much leverage. At this price new drilling will be curtailed which immediately gives rise to unemployment in that sector. CAT has already seen a siezeable hit in the energy and transportation segment after mining (~50% of equipment sales in 2012) fell to ~20% of sales in the last two years, so they’re hurting. A wave of defaults would then be passed on to the financial sector. Shale oil is ~5-10% of rail volumes in specially built cars that can’t be used for other purposes and the extra capacity for rail co’s is hurting pricing and margins considerably at a time when industry CAPEX is at an all time high. USGC petro-chem has been a strongpoint owing to its LNG cost adavantage in thermal parity with cracking plants. After billions in CAPEX over the last 4 years that advantage has nearly vanished as crude prices have come down. Yes, propane and ethane are lower for them, but some like Easton hedged into 2016 so its just a double wammy. For Boeing and Airbus they’ve sunk billions into new fuel efficient next gen platforms designed to roll out 2016 and now they’ve seen orders pulled as the cost simply doesn’t make sense for a carbon fiber based airframe.

For the world:

Judging the demand side has been the big question. Basically you see Ag, metal and energy commodities all at major lows and dropping. Sure some think it’s all just supply but in light of the deepening European crisis and fall off in SA growth as well as stimulus in effect in China and Russia, GDP decline in Japan, Venezuela, etc this doesn’t seem to be simply a supply issue. So its a macro problem as well, and a major one at that. I just don’t think the US can grow if the rest of the world is moving the other direction.

I could go on and on with this, but energy savings don’t mean better profits or hiring if they’re passed on through to customers or if the industries view them as temporary so they don’t change hiring or pricing. In that case it simply translates to postponed orders and hiring as people wait to see how the dust settles and layoffs for the energy industry. Economic positives could be years out.

You’re better than this…

Taleb never said “we dont’ know what moves markets”. I’ve often said that he is the most misunderstood and misquoted author around, which is probably a main driver in his frustration. What he does say is that we can’t predict the events that will move markets. For instance, without insider info, it was almost impossible to know that OPEC would take this action now. In a similar vein, obviously we knew what drove the collapse in 2009, it wasn’t just silly random coincidence that markets tanked as the mortgage books blew up. But predicting that that would occur and when was difficult although even taleb says that one wasn’t a black swan because it was predictable. He just thinks given the lurking unknowns its better to pursue an open ended strategy poised to benefit from non-linear or optional behavior.

What I find amazing is we are all so good at making sense of the past, but no one here can use that sense to predict future market movements with any certainty. Markets are a random walk and often there is no explaination to why things move as they do.

If you do know what the future outcome will be in the market, partcularly oil; get at me and I’ll hook you up with a commodities trading job paying $500k/year at the CME

Businesses are cutting back production, demanding less oil globally. That means equities will underperform. Whether or not there are supply issues, demand forecasts have been slashed in recent weeks and this certain reflects a slowdown. You would imagine demand surging at lower prices if the economy was well. On the contrary demand is falling alongside price. EDIT: I also disagree that markets are a random walk. They are influenced by millions of real factors, making it impossible to predict. So it may be de facto random, but not really random. The market is not a random number generator. But human behaviour and therefore micro and macro economies are vastly more complex than any man or machine can fully understand.

CFAMBA, you hire for those roles?

Anyhow, none of this has anything to do with prediction and I also don’t think you understand EMH / random walk. Both assume that known information is priced in. In this case, new information is being gained from Crude markets and the market reaction is the process of pricing that in. I didn’t say I could predict where Crude was going, but I can predict how it will impact both firms fundamentals and market pricing based on very real perceived losses. For instance, you don’t have to be able to predict where rates are going or when to understand that a huge spike in rates will cause mass defaults in the high yeild sector as borderline firms can’t roll financing. So if rates spike, CDS will react and it won’t be “random”. In a similar vein, the relationship between status as a going concern and price is not “random” and unpredictable. I can’t necessarily predict a bankruptcy, but I can predict that if a firm files chapter 7 equity is nearly always going to collapse barring additional factors.

I love it when people hide behind concepts they don’t understand in debates they’re misrepresenting. The fact is you’re clearly not following major global developments under the guise of “it’s all random”. Like unsustanable European debt is just random noise and has no fundamental basis or understanding. If prices were completely random (which is not what’s argued by random walk), then there would be no rhyme or reason tied to fundamentals. One day Facebook would be $2 a share and the next day it would be $5,000,000 per share and then $1 the next. But that doesn’t happen because random walk only describes variance around a mean, not fundamental average pricing and regime change. Random walk states that, “past price movement can’t be used to predict future price movement of the same security or set of securities” but does allow for contemporaneous impact of factors which is what’s being discussed.

You have that right. What I’m saying is that it is incredible that financiers are talking at ease about “x, then y, therefore z; LMAO, how can you not understand that, anytime I need a laugh I come by AF!” when in fact no one knew that pattern would happen at that time in that order.

My comment about the CME was just that. Top traders ring in $500k a year and despite living and breathing the global economic structure to predict the price of one commidity, they cannot do it with any consistent degree of accuracy. After the fact they can easily explain why oil did this when equities did that, therefore rates did the other thing.

Good ol’ hindsight, eh?


Today’s sell off is relatively random and does not have to do with oil specifically. I also do not think that you can say that slowing demand for oil is evidence of a broad slowdown in US equities anymore. The economy is not as oil demand based as it once was. The shale revolution in the US is a long term secular trend, not the principal driver of the more recent cyclical recovery.

NASDAQ is down more than the Dow today. This is randomness.

For those talking about how equities should go up when oil drops because it lowers costs of production, you are right. This is happening right now with myriad stocks, including transports (airlines, etc.) and utilities.

Nobody said that. They’re saying its evidence of a broad slowdown in the global economy.

Right, agree.

The fact that people struggle with predictions does not mean once you have new data you don’t know what impact it will have. The relationships described are very real business factors and again, the relationships we’re talking about are contemporaneous so continuing to talk about time and sequential events kind of shows your not following.

Maybe you should continue lecturing on theories you don’t understand.

Right, I guess everybody where I work has known the commodity supercycle was over for some time. The market has known this for a while too, as you can see the bifurcation of multiples between energy stocks and tech/HC/consumer stocks, especially in EM.

Whenever somebody tells me how “EM looks cheap” I just say to remove energy and have another look.

I think we’re on the same page, but not sure. Kind of sounds like you think I’m disagreeing with this.