As Syria Fades, What's the Outlook for Oil?
Quite a change of opinion at the White House, from defining chemical weapons as a "red line" 13 months ago, to seeking Congressional approval last week for action against Syria, to admitting "We can't resolve Syria's civil war thru force" during last night's address.
Wall Street has been (or perhaps I should say, had been) positioning for a U.S. military response by buying oil and defense stocks since June.
Curiously, other more traditional safe havens haven't responded. The dollar, gold and the 10-year bond have all traded lower since June, yielding to the pressure of an ultimate reduction of Fed stimulus.
Clearly the market is telling us that Syria, and the threat of escalation, is secondary to more traditional influences on asset prices like monetary policy. Otherwise they would all have risen. We're sensing a similar message today as strategists at Citigroup and Wells Fargo reiterated that Fed policy and better global economic data are still the two driving forces behind markets.
Political fallout aside, Syria may be becoming old news. This morning energy guru Stephen Shork of the Shork Group writes, "Oil markets continue to drop as the world discovers what the bad guys have known all along... the U.S. can no longer hold its mud." Ouch. Tough turn of events for the White House, but at least military confrontation will be avoided. To Schork's point, take a look at the speculative long position in oil futures, tracked by the Commodities Futures and Trading Commission:
I first discussed this chart on August 30. The current total long position of 465,000 contracts held by traders is holding near its all-time high. As the threat of military action subsides, and therefore the potential threat to mideast supply, Schork is effectively saying "the boys" will want to lighten positions. Lest there be any doubt, we have overlaid the price of oil onto the speculative position. Speculators took prices up and they're still as long as ever. I wonder who's left to buy.