Higher Oil Should Mean A Higher Stock Market

By Bryan Rich 

September 28, 2016, 4:30pm EST

Oil popped over $3 from the lows of the day (as much as 7%) on news OPEC has agreed to a production cut.

We’ve talked a lot throughout the year about the price of oil.  When it collapsed to the $20s, it put the entire energy industry on bankruptcy watch.

Of course, oil bounced sharply from those lows of February as central banks stepped in with a coordinated response to stabilize confidence. Not so coincidentally, oil bottomed the same day the Bank of Japan intervened in the currency markets.

The oil price bust all started back in November of 2014, the evening of Thanksgiving Day, when OPEC pulled the rug out from under the oil market by vowing not to make production cuts, in an attempt to crush the nascent shale industry.  At that time, oil was trading around $73.

You can see in this chart, it never saw that price again.

sept 28 crude 20 yr

OPEC was successful in heavily damaging the U.S. shale industry through low oil prices, but it has damaged OPEC countries, too.

What will the news of an agreement on a production cut mean?

A policy shift from OPEC can be very powerful.  In 1986, the mere hint of an OPEC policy move sent oil up 50% in just 24 hours.  And as we discussed earlier in the year, the relationship between the price of oil and stocks this year has been tight.  At times, stocks have traded almost tick for tick with oil.

Take a look at this chart.

sept 28 crude v stocks

An oil price back in the $60s would be a catalyst for a big run in stocks into the year end. For a stock market that has been rudderless surrounding a confused Fed and an important election, this oil news could kick it into gear.

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