Market Can Digest Current Price of Oil, But "Terror Premium" Is Steep
Rod Smyth, chief investment strategist for Wachovia Securities, told CNBC’s “Closing Bell” that the market can live with the current price of oil, and a return to oil's previous highs is unlikely.
Oil recently fetched $62.93 a barrel on the New York Mercantile Exchange.
“It’s entirely understandable that oil prices are going up in the short term, but it’s not a one way street any more,” Smyth said Tuesday. “A couple of things have happened. If you look at the earnings of all the oil service companies, you’ll realize there’s been a lot of drilling the last couple of years. Supply has come on stream and if you look the economic numbers, demand is slowing. So, our guess is that the trading range for oil does not take us back to the old highs.”
In the current market, he said investors should consider large cap, high quality stocks and avoid cyclicals. He’s over-weighted in overseas markets.
Craig Smith, chief executive officer of Swiss America Trading, said the threat of disruption of supplies is a major concern because the U.S. gets 23% of its oil from the Middle East; Europe, 60% and Japan, 90%.
He said the “equilibrium price” for oil is about $45 a barrel and anything above that is a “terror premium.”
Oil at $80 to $90 a barrel would hurt the dollar, crimp the stock market and boost gold.