When to Fear an Oil Spike
Rising Middle East tensions are making investors worry over a coming Oil spike, but there's a real reason for why such fears are unfounded for now.
Courage is knowing what not to fear.
Rising Middle East tensions are never a good thing for oil bears, as fear builds into price and concerns grow over a supply shock as a result. I've noted in my latest Lead-Lag Report that energy stocks (XLE) are coming back in a major way after having dramatically underperformed broader stock market averages for a long time now. That trend looks likely to continue, as oil prices near the $100 mark once again. But can that trend turn into a gap higher?
Much of the fear over an Oil spike is directly related to the potential for military conflict with Iran. However, logically any real spike potential in oil over military conflict should be confirmed by strength in military contractor and defense stocks. This has yet to happen. Take a look below at the price ratio of the PowerShares Aerospace and Defense Portfolio (PPA) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/PPA is outperforming (up more/down less) the denominator/IVV.
The trend in weakness has been quite strong for over two years now, which makes sense given the winding down of the Afghanistan and Iraq war. However, the most recent tensions have not caused a spurt of outperformance in those company stocks most sensitive to an actual real military conflict. That is not to say it can not happen, but if oil were to spike because of war, then logically defense stocks should begin to outperform meaningfully coinciding with that. For now, a spike seems to not be in the cards…yet.
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