Three Lessons on Oil

The last time oil was anywhere near $200 a barrel, the world was falling apart at the seams. Or so it seemed.

Looking back to 2007/2008, we can learnrn a few things about oil. Here’s a weekly chart of oil (black, right scale) and the S&P500 (green, left scale)…

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First, when Armageddon is approaching, hard assets like oil beat out paper assets like stocks. Oil surged 58% between October 2007 and July 2008. In the same time, the S&P500 dropped more than 25%.

Second, it takes the fear of Armageddon to push oil prices to $200 a barrel and beyond.

In normal times, when we’re not worried the world is ending, the dynamics of supply and demand governrn oil prices. And, as Rodney points out, oil prices are self-limiting. When prices get too high, demand drops and prices fall.

Just look at how oil has traded since we realized life will go on as normal. It’s been in a sideways range between $80 and $100.

Finally, commodities tend to peak after stocks. Oil prices topped out nine months after the S&P500 peaked in October 2007.

These three lessons don’t give us a crystal ball into oil prices. But they do provide a good framework to consider possible future scenarios. For example, if the S&P500 is peaking right now, oil prices could still move higher for several months.

But oil isn’t going to $200 a barrel any time soon. We’d all be walking to work – or drinking beer with Rodney – before that happened.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.