Russia & The Next Oil Crisis

Cliff Droke * Gold Seek

On the global market scene, Russia has been one of the major laggards this year. The Market Vectors Russia ETF (RSX), a reflection of the country’s stock market, fell 22% from its high earlier this year. RSX was testing a three-year low not more than a month ago and seemed to be in danger of breaking below this major long-term support.

Keeping in mind that the stock market is the single best barometer of future business and economic conditions, as per the old Dow Theory saw, things looked pretty bleak for Russia this summer…that is until the country caught a break from a major development in the commodities market.

Fortunately for Russia, the price of oil has been surging the last few weeks. Russia’s economy is heavily influenced by the oil price due to the country’s reliance on oil and gas production and exports. As goes the oil price, so goes the Russian economy, according to conventional wisdom. It’s not surprising then to see Russia’s stock market rally in response to the recent oil price spike.

Russia’s gain, however, is America’s loss. As the price of oil rises, it makes the cost of all fuels from diesel to gasoline more expensive. In turn, as fuel costs rise the prices for all consumer goods eventually increase. The gasoline price is a major factor in the U.S. economy and whenever gas prices become excessive it has negative repercussions for consumers. Consider the long-term trajectory of the gasoline price since 2008: after the credit crash five years ago, the gas price has rebounded and isn’t far from its previous all-time high.

The powers-that-be learned back in 1998 the folly of allowing oil prices to fall too low, for it nearly brought down Russia along with the rest of the global economy. Since then we’ve seen a global subsidization of the oil price to artificially high levels, and most particularly in the price of gasoline. Whenever things start to look bad for Russia, a rally in the energy markets always seems to come to her aid.

You may also recall that the high oil and gasoline prices of mid-2008 were the final catalyst that touched off the economic storm of that year. This isn’t to suggest that a similar collapse is brewing, only that the bull market and economic recovery will eventually be imperiled if fuel prices are allowed to keep rising.

A couple of useful barometers to watch in order to gauge the extent of fuel price pressures on the economy are the stocks of FedEx Corp. (FDX) and United Parcel Service (UPS). FDX in particular is still holding up well, while UPS has taken a hit lately. Rising fuel costs always weigh on these two key economic indicators and if FDX and UPS start to flag this summer, we’ll have a “heads up” that the fuel price increase will create problems for the economy.

Stock Market

The story of the week was the new high in the S&P 500 Index (SPX). The comeback of the SPX was remarkably fast, though this isn’t unusual given the historical tendency for the “megaphone” chart pattern visible in the index to bounce back quickly. Traders may remember a similar megaphone pattern in the SPX from the year 2005; like the current pattern, the megaphone of 2005 had a quick and violent turnaround (see chart below).

A similar pattern is playing out this time around with the S&P retracing all of its losses from the past few weeks and culminating in new all-time high.

A liberal rendering of the pattern’s boundaries (as I’ve drawn here), would give us an estimated upside target of around 1,720 – certainly within reach and not entirely out of the question. Already the 1,680 minimum upside objective has been exceeded.

Gold

My late mentor Samuel “Bud” Kress would often use the phrase, “He’s caught up in his underwear,” to describe an investment advisor who was forced to backtrack after making a blown market call. It would seem that the latest victim of “caught in the underwear” syndrome is the French investment bank Societe Generale.  

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