Opinion: Saudi Arabian king has power over the U.S. stock market rally
Published: Mar 14, 2017 3:25 p.m. ET
The kingdom is ramping up oil production, which could sink stock prices
President Trump deserves credit for the stock market rally, as he has unleased “animal spirits.”
No wonder it’s being called the Trump rally. But that was yesterday. The more important question now is who holds the most power over this rally in the weeks and months ahead?
The answer may surprise you. It is Salman, the king of Saudi Arabia. He is the absolute monarch. And Saudi Arabia is the biggest member of OPEC.
How does King Salman hold so much power over the stock market in the good old USA? There is, at times, a strong correlation between oil prices and stock prices. I have explained that in detail in my previous column, “Lower oil prices have the potential to take down the stock market.”
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To stay in power, King Salman provides lavish benefits to some of his people. Those are financed by oil exports. But rising U.S. production is bringing down oil prices. To generate the revenues that Saudi Arabia needs, the country may need to increase production. Today Saudi Arabia issued a report that its oil production topped 10 million barrels a day. Analysts were expecting a decline. The result is lower oil prices on the open market and downward pressure on stock prices.
Saudi Arabia’s previous strategy of increasing oil production to bankrupt American shale producers failed. The possibility that Saudi may now be forced to increase production to generate the higher revenues it needs cannot be ruled out. The present OPEC agreement to cut oil production will fall apart if Saudi goes the opposite way. Such a development may cause oil prices to fall up to 20%, according to the adaptive ZYX Allocation Model.
Stock investors may want to keep an eye on the chart of the United States Oil Fund USO, +0.41% an exchange traded fund (ETF). As an early warning sign, investors also may want to monitor the relative strength of the oil stock ETF known as Energy Select Sector SPDR XLE, +0.45% and popular oil stocks Exxon Mobil XOM, +0.51% Chevron CVX, +0.74% Haliburton HAL, +0.57% Marathon Oil MRO, +0.55% Continental Resources CLR, +0.63% and Oasis Petroleum OAS, -0.41% relative to the widely followed S P 500 ETF, the SPDR S P 500 ETF Trust SPY, +0.23%
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