|[source: Star Tribune]|
Last week the Federal Open Market Committee surprised no one when they raised rates 0.25 basis points to increase rates to between 1% and 1.25%. What did surprise the market, was the revelation that the FED is committed to normalize rates, even if inflation does not meet their target. This was reiterated this week in a speech by William Dudley, President of the Federal Reserve Bank of New York, who stated he feels the FED needs to raise rates, despite low inflation, to be ready to act if the economy does slow down.
Saudi Arabia named a new crown prince today; the current King’s 31-year-old son, Prince Mohammed bin Salman, who is openly upset about Iran and Qatar’s actions in Yemen. Oil Bulls point out that rising political tensions in the Middle East, specifically between Saudi Arabia and Qatar, will drive prices higher. This view may be right; that tensions could be rising and might lead to more state actions. Bulls point out, that a war between Iran and Saudi Arabia would send Oil skyrocketing. Today, however, investors seem to think war is unlikely; that there is a different way Saudi Arabia can harm Iran and Qatar. They can harm them on their balance sheets. Prince Mohammed could push Saudi Arabia to allow OPEC to lower the price of oil. Since Saudi Arabia has the lowest break even cost per barrel, lowering the price will hurt Qatar, and Iran significantly more than Saudi Arabia.
Oil is still above the key $40 dollars a barrel technical level, or $39.51 to be exact, and at this point, investors seem confident oil will remain above that level. Oil could be one supply glut short of being sent back to the 2016 low. Meanwhile, volatility remains historically low, Today’s June settlement was 10.71. Volatility traders should watch the $39.51 in oil level closely, while being mindful of what happened in February 2016, and the effect it can have on our stock market risk.
– Joe Tigay