You could say the Dow is making a bet on lower costs and a more predictable consumer by hitting these new highs, even with the oddity of current geopolitics. Then there’s the matter of a US-Iran accord that lets Tehran put oil on the market right away – something an investor can’t put off.
Cheaper crude changes the mood
When a barrel comes in at less than $80, it has a way of putting a lid on inflation and giving some breathing room to the margins of firms in transport, manufacturing and the like. That’s what’s lifting the spirits of the big index players and the cyclicals.
The Dow, with its share of old-line blue chips and industrials, sees better earnings clarity when energy is on the cheap. The fact that we are at a record says it all: money is going where the cash flow is strong and fuel isn’t a burden.
The US-Iran factor and the supply side
Word on the street is that a deal is in place for Iran to sell oil without delay. In a market already below $80, the idea of a few more barrels in the mix is enough to make a dent in the psychology of pricing.
We don’t have all the specifics yet, but the market doesn’t wait for the fine print. Traders are looking for any sign of what the rules of the road will be to see if this overhang in supply is here to stay.
A moving target for energy stocks
It’s not great for the upstream producers when crude is down. But refiners, the chemical and logistics crowds, and anyone who runs on a lot of fuel, they do well. The integrated majors tend to be in no-man’s-land, with their various streams of income to fall back on.
Should prices keep being held down, you’ll see a bit more restraint in capital spending from the E&P and service side. For the time being, the market is in the pocket of those with an edge on cost and the power to set their own prices.
Where the money is going, and where it’s not
A record Dow while crude is in the dumps is a tell. You’re seeing a rotation into the kind of industrial or discretionary stock that does better when the pump is cheaper. A retailer or a travel company will be happy to see a smaller energy tab.
Some of the energy shares, the ones with the most to lose on spot price moves, will be hard-pressed to keep up. Defensives will be fine, but the lead is likely to go to the ones whose operating costs are coming in under budget.
Inflation and the macro picture
Sub-$80 oil gives the policymakers a little leeway with the headline numbers. It won’t end the argument over rates, but it does change the calculus on the cost of moving goods and running a utility in the short run.
For the C-suite, it means better timing on cash and inventory. For the rest of us, it’s a small buffer on our wallets that can find its way into other kinds of spending.
Geopolitics and the nitty-gritty
There’s more to a US-Iran arrangement than what you see on a chart. How fast do the barrels get to where they need to be? What about shipping, insurance, and the willingness to buy? Those are the questions.
Without the details, there is some risk of a wobble. Some importers might want to see what they can get, and the producers on the ground will be sizing up how this affects their own plans and quotas.
What to have on your radar
It comes down to two things: whether the sub-$80 mark for oil holds and if the US-Iran story is for real. One or the other can turn the tables on a sector in no time.
We’ll let the data and the companies tell us if this is really a cost benefit. But if energy bounces or the policy line of the day changes, you can count on a quick repositioning.
Here is what to keep in mind for the week:
– Oil is under $80, which is a relief for inflation hawks.
– The Dow is at a record.
– We have a report of a US-Iran deal for prompt oil sales.
– Energy could be the laggard; the consumer the gainer.
– Expect some choppiness as the details come to light.
How to position for an oil-driven shift
If you have a lot of energy beta in your book, you may want to have a look at it if crude is to remain soft. There is opportunity in the downstream, in transport and with certain consumer names, while the upstream might call for a bit more caution.
Firms with solid books, a way to pass on costs and a reliable dividend have a habit of doing well when input prices are on the way down. On the trading desk, the hedging on price-sensitive items will be the clue as to where crude is headed from here.
The bottom line
The market has spoken: for the Dow, cheap oil is a short-term plus for the bottom line. And if the US-Iran side of things gets up and running, it only adds to the story of plenty in the pipeline.
Now it is a matter of following through. Until we have that, the path of crude will be the one to watch in determining which US stocks are on top and which are not.
