Oil price fears as tensions rise in Middle East

STOCKTAKE:ARING oil prices and Iranian tensions are a source of increasing angst. Iran produces almost 3.5 million barrels per day and a supply shock would dwarf last year's Libyan losses.

UBS has warned that crude may top $205 per barrel if Iranian exports cease. The worst-case scenario – a “complete shutdown” of Iranian oil – could see crude hit $270. Bank of America agrees prices could “easily” top $200 if Iran decided to block the Strait of Hormuz, through which about 20 per cent of the world’s oil passes. The oil supplies of Qatar, Kuwait and the United Arab Emirates (UAE) would be “completely” lost, as well as parts of Saudi supply.

An oil spike might be short-lived, however. Global demand shrank in the fourth quarter of 2011 for the first time since 2009. Crucially, while spot crude prices have risen by more than a quarter over the past six months, forward prices for 2015 are trading at a record discount, implying that markets expect prices to eventually fall below today’s levels.

Gloom over gold is premature

There’s been much chatter among technical analysts on gold’s declines (it recently suffered its worst daily drop – 5 per cent – in more than three years and also dipped below its 200-day moving average). But, when it comes to gold, the 300-day moving average is the key technical support level. Gold prices fell to this level on 10 occasions between 2001 and 2007 and bounced nicely every time.

One could not say that the metal is in rude technical health but unless the 300-day average about $1,600 is taken out, however, it would be premature to start writing any obituaries.

Buoyant market good for Obama

Mitt Romney appears certain to land the Republican presidential nomination, but buoyant stock markets mean President Obama is highly likely to be re-elected in November. That's according to a new study entitled Social Mood, Stock Market Performance and US Presidential Elections.

It looked at every presidential campaign since 1792 and found that unemployment and inflation had no predictive value, while changes in gross domestic product were “insignificant”.

The stock market, in contrast, was a “consistent indicator” of re-election outcomes, with incumbents doing much better in periods of rising markets.

The best indicator is not market levels over the full term of the presidency. Instead, compare prices to where they stood three years before the actual election date. The S& 500 closed at 1070 on November 6th, 2009 – today, it’s 27 per cent higher.

Separate data from Bespoke Investments found that, since 1900, only four presidents – Obama, Clinton, Eisenhower and Roosevelt – saw markets rise by more than 50 per cent during their first three years. The last three were all re-elected, with the Dow gaining by an average of 20 per cent during the fourth year.

Market dip may point to upswing

Last Tuesday’s market declines spooked investors but data suggests that the move is a minor pullback rather than the start of something more sinister.

The S& 500 had been technically overbought (trading at least one standard deviation above its 50-day moving average) for the previous 43 trading days, notes Bespoke Investment Group. The index then suffered its worst one-day decline since December, while European declines were the worst since last November.

Bespoke found 26 previous cases where the S& 500 remained technically extended for at least 40 days. Following the ending of this overbought streak, the index averaged gains of 2.93 per cent over the next month compared to the average monthly gain of 0.58 percent. Over three months, it averaged gains of 5.17 percent (or median gains of 6.36 percent) compared to 1.79 percent for all three-month periods.

Momentum is a powerful force in markets, so the bulls remain in charge for now.