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National Intelligence Estimate A Bearish Sign For Energy


The oft discussed "geopolitical premium" presumed to be built into energy prices has been pretty much eviscerated

During trading hours yesterday I saw a bunch of Bloomberg headlines regarding a new U.S. National Intelligence Estimate (NIE). I parsed through them quickly and made little of it; until, that is, I read an eye-opening piece last night from Stratfor. The bottom line is that the Dec. 3 NIE concluded that Iran halted its nuclear weapon program in 2003, and that since 2005 the U.S. has been overestimating Iran's plans to develop nuclear weapons.

You can believe what you will of yesterday's NIE, from it being a political fabrication to re-engage Iran into finding a solution for Iraq, to simply constituting bad intelligence, to anything in between, but as far as Wall Street goes there is little question about the following, and I will quote Stratfor:
"With this announcement, the dynamics of the Middle Eastern region, Iraq and U.S.-Iranian relations shift dramatically. For one thing, the probability of a unilateral strike against Iranian nuclear targets is gone. Since there is no Iranian nuclear weapons program, there is no rationale for a strike. Moreover, if Iran is not engaged in weapons production, then a broader air campaign designed to destabilize the Iranian regime has no foundation either."

And with that, the oft discussed "geopolitical premium" presumed to be built into energy prices was pretty much eviscerated. I will let Professors far more versed in the energy markets tell me how much that premium was and where oil might end up, but regardless, this has to be bearish news for the energy sector. How bad? Prof. Michael's estimate of high 70's/low 80's seems perfectly reasonable.

What does it mean for energy stocks? Here too, Adam's view that there may not be nearly as much downside to equities as there may be in the commodities makes perfect sense. I will add this chart of Crude and the Oil Services Trust Hldr (OIH) to further prove the point.

What does it mean for the broader market? Long time Minyans know that based on recent (and not so recent) history, lower energy prices are not correlated with broad gains in equities, regardless of what the broad media feed us on a daily basis. You can search the archives for many statistical takes on this point, but merely eye-balling this 4-yr chart of crude and the S&P500 (SPX) it is rather obvious that the two have been dancing together quite nicely.

Does it mean then that equity markets will fall together with energy prices? All things being equal, I suspect that lower energy prices would indeed be a drag on equities; but things won't be equal. The only thing keeping the Fed from mainlining the system with every dollar it can print is the risk of inflation. The mere thought that inflation might be restrained by lower energy prices should be carte blanche for Boom Boom to continue his compulsive monetary promiscuity. It matters not that, in my humble opinion, these actions will only prolong and exacerbate the current credit mess; if the Fed keeps printing, nominal asset prices will likely continue their delusional exuberance.

Right, wrong, or indifferent, the NIE ought to have Boo trading with his right hand up.
Position in OIH SPX
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