Monday July 19 crude oil futures dropped 7.5%
In this space we frequently warn that the crude oil and its refined products are both an economic and a financial asset. In fact financial shenanigans have a much greater impact on stocks and bonds than economic forces. Let’s take a look back a week ago.
The first indicator is implied volatility. This statistic is compiled from option pricing and volume. The indicator jumped 41.2% on Monday. That was the highest level since April 5.
The next clue is the spread between call options, bets on higher prices, and put options, bets on lower prices. Monday this spread fell to minus 13.7%, clearly a move to the bearish or downside potential in price. The $66 put option traded in huge volumes. Once the price decline began those who sold puts had to either buy them back, at a loss, or sell futures. Apparently most sold futures sending prices down.
That may seem a bit complex but it does explain the huge volatility of Monday. Prices approached $65 Monday. Price has rebounded about half-way to the high of $75-76 since then.
It seems reasonable that prices might re-test that $65 level by the end of August.
Recall that Fed Chair Powell has assured us higher prices, for everything, are transitory. Tell that to the markets. One group estimates prices that Unilever and Nestle, big food producers, pay will increase 14 % over the next year. The Consumer Price Index (CPI) has soared from just over 1% to over 5% just since January! The 1920s witnessed a boom in Florida real estate. It is back. A Beach FL vacant lot sold for $37M in 2017. It just re-sold for $140M, not a misprint. The Mansion section of today’s Wall Street Journal trumpets the Palm Beach Boom. A realtor knocked on my door just yesterday announcing the neighborhood had a 9% rise in prices this past year.
Soaring prices as with the dot.com mania in 1999-2000 are part of a developing market top. But we will need to see much higher implied volatility in the VIX index which measures just that before a top can be called.
Meanwhile mood trends negative in Haiti, Cuba, Venezuela, Russia, Hong Kong, Myanmar, and Malaysia. The political mood is so negative that Texas Democrats fled the state to Washington, DC. Democrats want to reinvestigate the Kavanaugh hearings. Murders in major cities are climbing fast. So far this negative mood has been ignored. Once things break over, expect crime to be headlined.