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Here we go again with a fall in the price of oil and Wall Street has succumbed to the move.

Wall Street slips on oil again! When will this end?

Peter Switzer
3 February 2016

The bears are acting typically like their grizzly namesakes – they’re not giving up without a fight. So here we go again, with a fall in the price of oil and Wall Street has succumbed to the move.

Yesterday, oil dropped but US stock market indexes rose. So there was a hope that there would be a decoupling of oil’s price driving the direction of the share prices. No such luck, however, with the decoupling lasting a day.

The two big issues that took the oil price under $US30 a barrel was the likelihood of a Russia/OPEC oil supply cut becoming unlikely and the mildness of the northern hemisphere winter, which has hurt demand for energy to simply keep warm.

We had nearly a week of an oil price rally, when a supply deal looked possible, but hopes here are getting weaker by the day. Meanwhile, the resilience of shale oil suppliers to low prices is surprising many experts, though there are signs there are cutbacks happening that should affect supply.

On Monday night, I discussed the spike in oil prices with Morgans chief economist, Michael Knox, who said there is a seasonal spike in oil prices around now, as winter fades and people come out of their winter bunkers and start driving more widely. That means another spike is possible but the OPEC/Russia deal looks off the table and explains the fall in the oil price now and the weakness on Wall Street.

I had an email from a viewer, who thought my wishing for an oil deal to cut supply was madness as he clearly enjoys lower petrol prices. That has to be good for the world economy but there are two parts to this story that can’t be ignored.

Demand is lower because China is growing more slowly and is pushing services over heavy construction and manufacturing, as its economy matures. Also the world economy is doing OK and is expected to grow faster than 2015 but the IMF and World Bank have pulled back their forecasts a tad.

These developments have taken prices down but so has this oil dumping by OPEC and non-OPEC oil producers, such as Russia. Some smaller ones are producing all they can to avoid going broke. The same is happening with small iron ore producers and tells us why commodity prices are falling.

This is a massive product dumping exercise, which illegal in most countries, if, say, China decided to dump cars in the US to bring down prices to cripple the car industry. It’s great that we enjoy low petrol prices but this is the worst of big business belting up on small business. And the stock market effects so far don’t show that lower oil prices are good for company profits and that’s why share prices are giving into gravity.

My stock charts expert, Gary Stone, thinks we could have a bit more of this near bear market experience looking at the charts right now. However, he argues that this is a primary bear market experience inside a long lasting secular bull market that has been bulling along since 2013!

These last 12-17 years so if you can cop the pain in the short-term, then there’s some good value buying opportunity right now.

I asked Gary if BHP looked attractive right now. Looking at the charts, he said he could understand if a contrarian wanted to dip their toe into BHP at these prices, but he invests based on the trend so he says he will wait until the price trend turns.

This is a good safe strategy so those going in now are more thrill seekers. But I have to say for those types of investors, it’s looking like an interesting bet, if you believe the secular bull market eventually reasserts itself. And I do believe that!

One final point, we see US job numbers on Friday and these, on top of US company earnings, might shake some sense into these crazy stock markets. If they don’t then prepare for more primary bear market fear and anxiety.

All this negative stuff will change to positivity, I just don’t know when. Sorry but I’m maintaining the faith, just like the Reserve Bank. If it was worried, it would have cut rates yesterday. Like me, they’re cautiously watching overseas market developments but they’re happy about the Oz economy, which is clearly getting better.

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