Market Update: Oil, Broader Markets Bracing for Corrections
The bears are out in full force this week. First, BP’s CFO Brian Gilvary warned on CNBC that the crude oil price, which is trading at approximately $67 per barrel, appears “frothy” at these levels. Meanwhile, Mark Mobius, painted a more bearish picture for the broader stock market when he said that stocks, which have been on a nine-year bull run, could correct by as much as 30% to 40%. Let’s take oil first.
Crude oil is up by nearly 13% year-to-date, approximately 25% versus a year ago and it’s nearing the psychologically important $70 per barrel level. Meanwhile, production is robust at the major oil producers like BP, where the company’s Q1 upstream results were akin to when oil was trading in the triple digits, according to Gilvary.
But rather than celebrating oil’s return to glory, Gilvary added a cautious tone, suggesting instead that prices could instead be due for a pullback, issuing a reminder of how far oil had fallen before it resumed more bullish levels.
“[It’s] short-term memory. Sometimes people forget that it was only not that long ago we were down at $28 per barrel … I think oil prices today feel a bit frothy at around $75 per barrel.”
The drivers of the oil price, Gilvary said, are comprised of solid demand and “strong OPEC compliance,” which he added took production out of the market. But with the United States upping its production game coupled with heightened geopolitical pressure from the likes of Iran, for instance, not to mention the pressure that speculators could put on the price,”things will start to temper,” Gilvary noted. As for BP, they’re sticking with their current capex plan and won’t try to “chase these prices that we see today.”
Stock Market Correction
Meanwhile, Mark Mobius, who came out of retirement from Franklin Templeton to launch emerging market-focused Mobius Capital Partners, issued a separate bearish prediction. He is calling for another correction in the bull market that’s been unfolding in the broader equity markets for nearly a decade, telling CNBC that he’s “much more cautious” these days.
“There could be a substantial correction in the markets.” – Mobius
His prediction is focused on the short-term, and it doesn’t exclude emerging markets. Over the long term, however, he believes that emerging markets “will do very well.” But in the interim, he is bracing for a “dramatic” short-term correction.
“Thirty, forty percent is not unreasonable,” he said, pointing to the “long” US bull market, a correction in which would spill over into other markets “including emerging markets.” It sounds like Mobius believes the market just needs a breather from the multi-year bull run, but possible triggers could be the Fed raising interest rates and geopolitical forces.
Meanwhile, “the average bull market ‘correction’ is 13% over four months and takes just four months to recover,” according to a Goldman Sachs report from January.
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