PARIS (ResourceInvestor.com) -- If ever there was a moment when the disconnect between stocks and oil was evident, it was during the downturn in the Dow Jones in the last fortnight. While the equity markets took a serious hit, albeit most likely to be a correction - not a crash, oil carried on firming up and hit $62.
Even those people with a casual acquaintance of the markets should be interested in the way we have seen a multiple change in the way equities and energy inter-react. Normally if stocks went down for a non-energy reason such as panic, the price of energy would follow. The idea is that weaker companies will breed weaker performance, resulting in lower consumption. This is no longer the case.
We also used to see a steep, sharp rise in the price of oil adversely affecting equities. Any oil shock, say, over a war, would mean higher costs passing through to companies, and therefore the market would sell off shares in anticipation of a downturn. Again this is no longer the case. There are several reasons.
Firstly, the market is not logical and those in the know realise this. It no longer sounds convincing to come out with grand resolute theories about the relationship between energy and equity. Instead technical plays and software are much more reliable, making money off of percentage bets, good old Tony Soprano skimming, placed by a computer. The whole process is far more successful. Time and time again we see software setting the pace and computers have their own logic which only studies the now, not the future or the past.
Secondly, the size of the major oil companies such as ExxonMobil [NYSE:XOM], BP [NYSE:BP], Royal Dutch Shell [NYSE:RDS-B], Chevron [NYSE:CVX], ConocoPhillips [NYSE:COP] and Total [NYSE:TOT] is on a different scale than days gone by. These companies now are so huge they distort whole indexes.
Kurt Wulff of McDep Associates places a fair value on ExxonMobil of $500 billion, one company worth half a trillion dollars. Now Mr. Wulff might be around $100 million ahead of ExxonMobil’s current market capitalization, but his assessment is probably wide of the mark on the downside. If you fully factor in the amount of reserves the major oil companies have, their value will start to run off the scale.
Thus, when the price of oil rises, or gas for that matter, oil companies pick up steam and actually pull up the equity markets. In the meantime they pull away from their non-commodity based competitors such as manufacturers and retail corporations like Wal-Mart [NYSE:WMT] in the U.S. or Tesco [LSE:TSCO; Nasdaq:TESCO] in the U.K., despite these companies being huge in their own fields.
It is, of course, rather like life. The overall growth of the markets is in huge part due to deregulated fiscal markets and commodities. Companies in these areas can grow at a rapid rat - they give the impression that real growth is happening in the market place and that all is well. In fact what is happening is that wealth is being passed up the chain, from users of energy to providers and their bankers.
One of the other factors that fuel this process is that, like it or not, oil is becoming increasingly hard to find. Call it "peak oil," call it "resource nationalism" by OPEC countries, call it an “investment deficit.” However you like to phrase it, companies are finding it harder and harder to put on production.
In the short term, this does not do those companies a lot of harm. Individual executives may get some angst. They may even have to leave various companies early. But the bottom line remains unaffected - shortage creates profits.
Exacerbating the shortage of easy oil are the OPEC countries who are starting, as Qatar said this week, to plan for long-term sustainable futures. Corporations are inefficient, outdated and greedy. They are not interested in energy per se - they are interested in profit. Companies can always leave countries once they have nothing left to take from it. But the people of the country cannot up sticks so easily, although millions are trying.
Instead the countries with reserves will start to quietly say to companies, "Sorry, we do not want you. We do not want to sell our hydrocarbons on to the market anymore. What we want to do is to keep them for ourselves and our populations." Populations in the Middle East are young and rapidly expanding. You may be starting to see the beginning of this process in Qatar, Kuwait and Venezuela. Those who believe only in markets may be about to see the clearest signal yet that their experiment has failed and will fail comprehensively in years to come.
Market disconnect is the future. The times are changing.
