This is going to be a blockbuster week for the market and is likely to set its tone and direction for the days and months that follow. Everyone is preparing for the 2022 midterm elections on Tuesday with the obvious gargantuan implications for not just the nation, but…
the economy and the market as well.
There are predictions as to what the results of the elections may look like, and it is looking like Republicans are likely to win back the House with the Senate being a toss up. Predictions on what that means for the market are also out there. Since the House has the power of the purse, there is a belief that if the Republicans take back the house they would be able to stem the flow of government spending, which would be good for inflation, rates, and Treasury supply.
There is also the idea that the Republicans will be less restrictive towards certain industries, particularly the energy industry, more specifically, the oil industry.
So let’s talk about that…
Without placing our bets on either side, the energy industry and which direction it will go in the future largely hinges on which side is in power. On the Democratic side, we’d likely see a further push towards green energy with greater investment and subsidies. On the other, less restrictions on domestic oil production and American oil companies.
If there were ever a flashing warning sign to pay attention to oil prices, this would be it. Like investing, we are just going to follow where the evidence is pointing us, and in this case it looks like we could be making a U-turn, back to a focus on domestic oil production and exporting.
So which names should we be focussing on? Perhaps it’s not one or two specific names, although many of those names pay a great dividend so could be a good investment for income investors. Rather, it could be the direction of oil prices…
Economics 101 centers on the idea of supply and demand. If there is increased supply — enough to meet demand and then some — prices fall. This oversupply creates downward pressure on prices. If the full might of American oil production is unleashed and the world is no longer left to the whims of the OPEC+ nations, then we should see increased supply, increased competition, and ultimately, a decrease in prices. This is supply and demand in motion. As a bonus, a decrease in oil prices would deal a significant blow to CPI; however, this won’t be immediately reflected in this upcoming CPI report, but rather, future reports.
At any rate, the idea is that if the Republicans take the House, they will work to bring the price of oil down, which gives us an early chance to identify opportunities to short the price of oil as seen below…
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