On Falling Oil Prices

Price Has Memory. Read On If Still Interested

It is surprising how much the financial press and certain market participants globally appear to be both shocked and bemoaned by the fall in oil prices.

Price Has Memory

I have consistently emphasized that price has memory. A major price level once reached serves as an attractor when prices move in that direction, even years later. Market participants who made decisions for various reasons at that price range the last time around drive this attraction. As the 70-year chart below shows, the $35-40 range in WTI Crude Oil is an important (although by no means the only) memory price range for the asset. As such, it should not come as a major surprise, within the context of the macro environment, that prices have reached this level once again. As the chart shows, there is another important range of $20-$25 that also contains price memory. If the macro environment for Crude Oil remains the same or worsens, then the probability of seeing prices in this range will increase into next year.

Do You Care?

Without question, energy investors are concerned about the drop in oil prices. A narrative seems to have taken hold, at least within the financial media, of falling oil prices being negative for stocks and of grave general concern. Articles abound about “what happens next?” However, this feels a little like Wall Street convincing Main Street that zero interest rates are good for them. Zero interest rates punish savers and reward the investor class or those who are tolerant of the new normal volatility of the stock market. How exactly are low oil prices bad for the average person? They are not. This development is a boon for individuals. Driving, heating, and flying cost less. The average person, whether an equities investor or not, should welcome lower oil prices. Investments in oil companies have suffered. If you have some of those in your portfolio, please reread the section Price Has Memory above.

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Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. Accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.