A recession can occur much more quickly if crude oil prices don’t stabilize. Dennis Slothower thinks it is critically important to understand that in the month of October, the stock market is going to be extremely sensitive to the direction of oil prices. Presently, we have conflicting opinions among traders on the storms’ effect on supply and demand for oil. The demand side of the equation is slowing, in part because of a slowing economy, the season, the damage to demand caused by the storms, and, of course, because soaring gasoline prices are forcing people to conserve more. The Fed is tightening by pushing interest rates higher and higher, with the yield curve helping to reduce bank lending. This reduces consumer spending, and that in turn helps to slow demand. All these variables will put downward pressure on oil prices, but nothing like a recession will.
However, when we look at the supply side of the equation, with so many key refineries down now and likely to be that way for weeks if not months, the ability to provide supply is very questionable, especially ahead of the key winter months. We are also not out of the woods in terms of further hurricanes. Meteorologists examining the conditions that spawned hurricanes Katrina and Rita say there is a strong likelihood that another intense hurricane will occur in October.
Further, while late-season storms tend to track eastward toward Florida or don’t make landfall at all, the experts don’t rule out the possibility of another major storm targeting the battered Gulf Coast. However, the big worry is the ability to produce enough refined products ahead of the winter months when heating oil and gas are in high demand. So far, refiners have made little progress in recovering from the two hurricanes, with a dozen facilities—accounting for 18% of U.S. capacity—still lacking firm schedules for starting up.
While opinions vary over demand and supply issues, Slothower thinks this much is clear: technically, the primary trend in oil is in a bullish uptrend. The trend is above both the weekly and monthly middle Bollinger Band lines, and as long as it remains so, it must be considered that new highs are likely. Slothower is not very hopeful that we are going to escape this mess until the demand for oil collapses, and the only way that is going to happen in any real measure that he can see is with a recession. With oil prices pressuring toward $70 per barrel again, it puts the stock market in serious jeopardy in the next quarter.
This article highlights the commentary of Dennis Slothower for the Zacks.com audience. Dennis Slothower provides insightful analysis, market commentary, and favorite recommendations on a timely basis in "Stealth Stocks" newsletter. Try it free for 30 days and see if you can improve your investment performance. Learn more about "Stealth Stocks" and 30-Day Free Trial. And get immediate access to current issues and special reports. Click here now.
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