Why isn't the market more fearful of an oil spike here? Why are we comfortable, if not bullish, when oil runs as it did yesterday and the early morning today over Middle Eastern tensions?
First, I don't think the market is ignoring oil. When missiles fly back and forth between the Iranians in Syria and the Israelis over the somewhat peaceful Golan Heights area, it should be unnerving. If there is going to be a hot war besides the one between the Saudis and Yemen, it could be between the Israelis and the Iranians, with the U.S. and Saudi Arabia - strange bedfellows, actually pulling for and outright helping Israel.
But I think that the stock market knows not necessarily to trust the oil futures. Stock traders know that oil traders are a skittish bunch and take oil up on any and all tensions. They seem to know only one thing: take oil up on bad news and the equities people have become suspicious of big runs, especially ones driven by geopolitical risk and not demand.
I think that's because we all remember the ridiculous spike in oil back in 2008 that ended up in a total collapse of the market. It's worth it to recall what happened back then because it is instructive about why stock players have one eye on the oil market but not both.
With the world's economy, particularly China, in growth mode in 2008, even as our economy had begun to fall apart, we knew there was overseas demand for oil.
The oil market had been in a trading range between $40 and $60 for several years coming in to 2008. Then beginning in February, the political problems in Venezuela, a key OPEC country, began to surface as they cut off oil sales to Exxon Mobil (XOM) . Venezuela's problems coincided with a break out of the $40 to $60 range into the $80s.
Then in March two major pipelines from Iraq were taken out by terrorists. Oil suddenly jumped to the nineties.
In April, a Nigeria workers strike cut Exxon's production, taking 780,000 barrels a day off line. At the same time a strike by Scottish workers took out half of the UK's production.
In May, Nigerian rebels blew up pipelines that took out another 600,000 barrels a day at the same time that Mexico announced some shortfalls at its biggest field in the Gulf of Mexico.
Next thing you know oil's breaking out above $100 and flirting with $120.
Then on June 19th and 20th, Nigerian rebels shut down the Shell (RDS.A) and Chevron (CVX) pipes and oil blasts through $120, and finally in the first week of July, on no real news, oil takes out $140 and touches $147.
What happened after that is indicative about how fragile, skittish and, at times manipulated because the market simply collapsed pretty much in a straight line, all the way down to $31 on December 22 of the same year, a spectacular $110 swan dive.
Gasoline, which had gone to an average of $4.11 a gallon was cut in half by year's end.
Now, given the fact that the whole way up and the whole way down we were headed into the depths of the Great Recession, the whole pivot to $147 seems like it was pure manipulation. But it is fair to say that higher prices simply met with little selling the whole way up. It's almost as if there is no spare capacity to sell, but that turned out to not be the case. It just couldn't be ramped up fast enough.
And that's what I think is happening now. The oil market is terribly inefficient and supply seems to be provided only by the short sellers, who then cover when no new oil comes to the market. There's not enough time to find real sellers or they are all holding out for higher prices.
Whatever, the equity buyers know not to trust the spikes. They learned that in 2008. And how about the damage to the economy? I think that it wasn't clear how much damage it did then but one thing is clear, cars get a lot more gas mileage today than they did back them. As Phil Labeau told me today on "Squawk on the Street", $5 is the new $4 and we are nowhere near $5.
So, sure, oil's gotten up there. But we know the futures aren't necessarily real and that's keeping the stock market from drawing a conclusion that stocks must be sold en masse because of oil's sudden jump to the $70s or even beyond.