On Saturday, Saudi Arabia’s oil industry was attacked in a sudden, coordinated strike. Yemen’s Houthi rebels claim responsibility; saying that they used drones to carry out the attacks.
U.S. officials, on the other hand, believe that Iran is to blame.
Either way, the fact is that Saudi oil output has been slashed in half, causing oil prices to spike worldwide. Brent crude prices shot up almost 13% – a historic daily gain for oil – as the stock market dropped amid a new wave of uncertainty.
Because if there’s one thing that investors understand, it’s that rising oil prices are a bearish signal.
Or are they?
Historically, oil price disruptions have had a negative short-term effect on the stock market – a universally held belief that has proven to be true.
But what’s also true is that equities eventually recover from the oil-induced dips. In fact, over the last decade, the oil and stock market’s negative correlation has mostly dissolved. Since the financial crisis, both stocks and oil have logged impressive years in gains.
Often at the same time.
Take 2017, for example, when the S&P 500 rose 19.42%. Brent crude prices increased by 17.40% over that same period.
From 2009-2013, the S&P enjoyed a 104% gain, while Brent crude went up 135%.
In some ways, it almost appears that they might even be positively correlated. That is, until you take a look at the market’s 11% gain from 2014-2015, a time when Brent crude dropped over 66%.
So, while investors may have had a reason to fear rising oil prices in the past, the fact is that these days, oil alone doesn’t cause market downturns.
International economic and political uncertainty does.
Which is precisely what’s got the market in gridlock, as investors watch and wait to see what America does in response to the attacks.
And with Iran as the prime suspect in the eyes of U.S. officials, stocks appear nervous about a retaliation from the West – something that President Trump says is unlikely at this point.
“I don’t want war with anybody,” he said on Monday when asked about Iran by reporters at the White House.
Some analysts, like Oanda’s Edward Moya, don’t see an escalation happening, either, thanks to the world’s ample emergency oil reserves. The damage, however, may end up being worse than initially expected.
“The shock loss of 5% of global crude production has markets focused on how soon Saudi Aramco can bring back production and if we will see the US or other countries use their respective strategic reserves,” he wrote.
“The latest update shows Saudi Aramco’s initial calculation on the damages may have been too optimistic and some customers expecting early October deliveries will likely see shipments later in the month.”
Whether the delayed October oil shipments will have a significant effect on equities remains to be seen, but based on how the market’s performed in relation to oil over the last 10 years, it appears highly unlikely.
If the U.S. exacts revenge against Iran, however, you can likely kiss a new all-time stock high goodbye.
Because uncertainty, the market’s biggest fear, could send bulls running the instant it reappears.
