Yesterday Trump talked down oil prices.  Today oil prices came right back.

We’ve had a full recovery in stocks from the sharp declines to end the year.  Will oil prices also have a full recovery, back to the mid $70s?

My bet is yes, maybe much higher if we get a deal on China (and therefore an upside surprise on global growth).

Let’s take a look at this oil/stocks relationship.

You can see in the chart above, stocks and oil went down together. This is no coincidence.

Remember, a trigger for the decline in stocks from the top (October 3rd) was the implication of the Saudi Crown Prince in the murder of the journalist, Jamal Khashoggi.  Oil topped the same day, and then accelerated the day Trump spoke with the Saudi Crown Prince on the phone on October 16. Oil opened that day at $72 and hasn’t seen the level since (forty-three days later it was trading at $42).

With that, as I’ve said over the past several months, while the Fed always likes to exclude oil prices in their formula for measuring inflation, oil prices matter (a lot).  They mattered a lot in 2016 when oil prices crashed to $26.  That set off deflationary fears around the world and led to over $12 trillion in negative interest rates on global government bonds – and a response from global central banks.

So now we have another response from the Fed (and global central banks) — responding to stocks and the deflationary pressures of lower oil.

And now, importantly, the threat of sanctions on the Saudi government have now passed (which was a danger to global markets).  Trump settled on sanctions that exclude the Crown Prince and broader government.

With that, I suspect, this move above $55 in oil will sustain and lead to a catch up of the orange line in the chart, to the green line in the chart.

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