The oil market is pricing crude back down to about $70 a barrel by September or October. Read that as a forecast, because that is exactly what it is. It says hostilities end, oil flows again, and the Gulf calms down inside of two quarters. That is good news, and that is how I am positioned.
The supporting evidence is the correlation. Since the beginning of the hostilities, oil has traded inverse to both stocks and bonds. Crude up, risk assets and fixed income down. Crude down, both rally. A lot of people think that correlation should break. A lot of people also think equities are richly priced given the chaos and the economic collapse in the Gulf, to say nothing of the destruction of life and property there, which is a real crisis and not a market variable. That case deserves a hearing. The correlation has held anyway, and I trade what holds.
I know plenty of people disagree with the $70 path, and I could be wrong on it. Getting there will not be an easy step. But the objective everything now runs through is a narrow one: eliminate the threat to the free flow of oil to the global economy. Price that risk out and the curve is right. Leave it in and the curve is wrong. That is the whole question, and the market has already told you which side it is on.
