Higher oil prices could dent any rally in stock markets

David O’Shea, investment manager with Quintas, examines how oil could have knock-on effects on other sectors

OIL has risen more than 50% over the last six months. While volatility in the Middle East has been making headlines, more than 80% of this increase is down to the strength in the global recovery. This is borne out by the fact that nearly 50% is produced by a combination of Russia, Saudi Arabia, US, Iran, China, Canada, and Mexico. Libya produces 2% of global oil.

One of the other factors driving oil price, at least in the short term, has been increased speculative activity. Speculative positioning and trading volumes are at all-time highs. There has been a significant increase in buying of deep out-of-the money call options, which bet on more price surges. While this suggests the market is positioning for a move higher in oil prices it also warns of potential excessive moves lower should these positions be liquidated.