Oil and Stock Market Commentary

The shutdown of the Saudi Yanbu pipeline has significantly escalated the energy crisis with up to 7MM barrels of capacity out of service. We now estimate that WTI oil could trade as high as $120/barrel with a new imbalance in supply/demand of 12MM barrels, which could cause the spike in oil to the $120 range as every 1MM barrel of supply shortfall requires a $5 increase in oil prices to bring the market into balance. The prewar equilibrium price was approximately $60.

We do, however, expect the 10-year treasury to stabilize in the 5% area as this reflects two Fed rate increases and the 10-year normally trades at 100 over the Fed Funds terminal rate. We estimate that if the Fed raises rates two times that the Hatfield Recession Rule will be triggered with housing starts dropping below 1.1MM per year.  This worsening housing recession will drive GDP growth below 2% despite the AI boom, which will put even the fatally flawed Fed on hold as they see the damage they have wrought with their irrational rate increases.  

We see support for the stock market in the 7,300 range during the normal Fall stall in the stock market.  We have raised our year end target on the S&P to 8,300 as 27 earnings estimates steadily rise and are now 18% higher than at the begging of the year.