Tensions in the Middle East threatened Iran’s oil supply as the passage through the Hormuz Straight. Realistically, Iran has very few capabilities for anything long-term. In the meantime, the price of oil has shot back up.
Beyond this geopolitical noise, the fundamentals remain, and Saudi Arabia is dumping into the market to pressure prices lower. In the meantime, anyone sitting on oil is now dumping into this market to make some margins. If Saudi Arabia is going to push the price back down, firms would be well-served to take advantage of any short-term price spikes.
I don’t expect the elevated price of oil to be sustained here—prices are already moving lower.
Then there is the economy itself: Tariffs are still here and will reduce overall economic output. In that environment, supply will outpace demand.
However, even that won’t last as Saudi Arabia eventually reduces its policies.
SCO ETF: Oil Inverse ETF
If the price of oil is going to fall right back down, then any inverse ETF would head immediately back up. SCO ETF is the ProShares UltraShort Crude Oil ETF. As oil prices fall, the inverse ETF moves up (In a non-linear, perfectly correlated move).
I play this ETF often when I feel the price of oil has moved outside of its fundamentals—this is a perfect example.
Again, though, when the economy slows, the price of oil will fall further. Eventually, the unprofitable and more narrowly profitable firms will fold up. We have seen the results of the latest price movements lower for oil pressure rigs to fold here in the United States—rig counts are falling modestly.
This adds up around the world. With more and more rigs going inactive, supply eventually starts to dwindle. That is when Saudi Arabia would more likely reduce its output.
This will take time, but I believe all of the pieces are falling into place. The economy will grow at a slower pace due to tariffs and higher interest rates. The money supply is continually being reduced, albeit at a minimal level every month. Simultaneously, with the Bank of Japan slashing its JGB purchases, bond prices worldwide will fall.
Although the Mag-7 stocks may be driving the broader stock market higher, most other stocks have not performed as well. Divorcing the Mag-7 stocks from the broad index is a bit more sobering as to where the overall stock market is, and future economic indicators could wobble the stock market.
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