Why This Week's Market Overreaction Won't Affect Energy Demand

Some days you just want to crawl back into bed and pull up the covers. Wednesday was certainly one of them.

Greece has until Sunday to be saved from financial oblivion, and the Chinese stock market looks like it has come unglued. On top of these crises, the New York Stock Exchange stopped trading for over three hours Wednesday because of a "technical" glitch.

Now, other trading platforms remained open. One could still trade NYSE-listed shares on the Nasdaq and some 10 other exchange locations. The redundancy in trading avenues, occasionally criticized by many (myself included), certainly came in handy. After all, in just about any other place on the globe, an event like this would have resulted in folks sitting around staring at blank screens.

Yet coming after another computer glitch had grounded all United Airline flights worldwide and after something else caused The Wall Street Journal website to go down, it made quite a morning for both doomsayers and conspiracy theorists.

EnergyThere was no cyberterrorism or hacking suspected in any of these shutdowns. Nonetheless, three such incidents in the span of a few hours would seem to strain the laws of probability.

Anyway, assuming the world as we know it more or less functions today, the condition of energy prices has once again taken center stage.

Here's my take on what's really going on with energy prices...

Too Premature to Make Predictions on Energy Price Effects

There are certainly reasons why energy is the center of focus despite having little to do with either the cause or the acceleration of the major problems (the market slide was not prompted by a collapse in energy demand, nor was it accentuated by one).

Still, when events like these happen, all attention invariably turns to the effects they have on economic and market improvements. In short, the causes may be varied, but the focus is always the same. What will this downside event do to the level of energy needed globally?

To be sure, such projections as the event unfolds are very premature. They are knee-jerk reactions at best. Any concerted estimation of demand levels requires at least a quarter or more of data. This is not a day-by-day exercise. After all, we have had spikes in oil prices in the recent past based on only a few drilling rigs up or down in the count Baker Hughes gives us each Friday.

This has been crass overreaction. Here's why...

Concerns from Greece and China Will Have Limited Impact on Energy Demand

Yes, Greece and China are concerns (even when the NYSE is functioning smoothly). But they still have very limited impact on energy by themselves.

The Greek market is quite small, and the European Central Bank is much better able now than two years ago to "picket fence" a protection for the rest of the European Union should the package proposed by Athens today (Friday) be rejected by the final summit on Sunday. That rejection would almost certainly force Greece to leave the Eurozone.

China, on the other hand, has a huge economy that directly influences global trends. But its fledgling stock market is by and large insulated from world capital flows. Its more than 80% rise in less than a year had been caused by intense domestic speculation resulting in bloated book values for the paper held.

Yes, you can get into the Shanghai Exchange through the back door (the Hang Seng in Hong Kong), and there are some exchange-traded funds available here in the States that reflect the Chinese market. But these are very indirect. There is no immediate way contagion can spread from the Chinese market to more liquid exchanges elsewhere.

This is all a matter of perception at this point. The response to both a very long, drawn-out Greek debt tragedy and a more recent Chinese stock market meltdown is psychological. There are no data to sustain energy concerns, nor are there indications that global demand is faltering. In fact, overall energy demand this year will be coming in at a level higher than at any point in history.

What a Difference a Day Makes

So what does this really tell us? Investors remain spooked and have a craving for instant (and dangerously misleading) analysis.

Then there is Thursday morning as a case in point. The Chinese authorities had already limited the trading of some stocks. Overnight they also prevented anybody who held 5% or more of any company from selling those shares for six months.

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Shanghai responded with its highest daily increase in over six years. European exchanges were up triple digits at open. And crude oil prices were up more than 3%. U.S. indexes responded by spiking up, buttressed in no small measure by a NYSE computer system that appears to be functioning smoothly.

This is not a financial game of musical chairs. Cycles happen, as does the overreaction by investors to those cycles.

But the last few days have made me yearn for the weekend.

Of course, there is that EU summit meeting on Sunday, which is certain to interrupt any rest I had hoped would be coming. I'll keep you posted.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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