Oil prices could rattle stocks in 2016

As someone in their mid-50's, I am old enough to remember the start of oil-price gouging and the beginning of OPEC (Organization of Petroleum Exporting Countries) holding our energy consumption hostage by controlling the supply of crude and keeping prices high. I can recall waiting in line with my late father for hours to get a tank full of gas because shortages were so widespread that refineries around the country sat idle. The price of crude skyrocketed and the economy seized.

A worker adjusts the valve of an oil pipe at West Qurna oilfield in Iraq's southern province of Basra.
Atef Hassan | Reuters
A worker adjusts the valve of an oil pipe at West Qurna oilfield in Iraq's southern province of Basra.

The U.S. found itself in yet another recession, this time caused by outside forces controlling our input costs. But something wonderful has happened in the last few years — technology has forced OPEC to back off. The U.S. will be held hostage no longer and that is bullish, long term, for everything. We are watching OPEC slowly disintegrate, and I couldn't be happier.

The organization was formed in 1960 but by the early 1970s crude became a weapon in the hands of OPEC, plain and simple.

We have been at the mercy of our friends in the Middle East and even have allowed terrible regimes to remain in power in order to sustain access to the black gold. It's interesting that OPEC is producing roughly the same amount of crude today as it was 30 years ago, while the global economy has grown tenfold.

Prior to the technological revolution in U.S. energy production, 81 percent of the world's proven oil reserves were located in OPEC member countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 66 percent of the OPEC total. But things change; we have seen a 75-percent increase in reserves in the U.S. since 2008. Even more important, the Energy Information Administration estimates U.S. undiscovered, technically recoverable oil resources to be an additional 198 billion barrels. Yes, we are bigger than Saudi Arabia!

But the relationship between the crude market and global equities has always confused investors and traders. It is widely believed that lower crude prices are good for equities in the long term, but the short-term effects of the lower prices are complicated. Take government-owned sovereign wealth funds for example: Over $5 trillion is invested in global capital markets from SWF's coming directly from oil-producing nations. As the price of crude continues lower, so does the revenue for the producing country. When national budgets of various oil-producing countries are determined by crude prices, then a lower price forces capital to be repatriated back to the country of origin (and we haven't even mentioned Russia, which is flooding the crude market for budgetary reasons). It's not that they want to sell, they have to sell. Think of it as the country's margin call.

There are many reasons for the U.S. energy revolution, including conservation, alternative energies and most importantly, the ability to find 200 to 300 years' worth of crude in our own backyard. As we watch OPEC slowly disintegrate, it's important to realize the disruption which will cause extreme volatility over the next couple of years. In 2016, we may witness mass liquidation from SWF's as crude plunges to lower levels.

As a long-term investor I love the foundation of low inflation, low input costs and technology making us energy independent, but as a trader, I understand that, in order to achieve that goal, the short-term dislocations will be staggering. The velocity of the move will be based on the movement of the dollar in conjunction with other major global currencies; A fast move higher in the U.S. dollar will force the price of crude lower quickly (crude is denominated in dollars globally) and force selling by those who need capital. This will be the catalyst for a deep correction — maybe 20 to 30 percent.

We are entering the final leg of the first stage of the secular bull market which began in 2009. As we watch the market enjoy the Santa Claus rally, remember that the election-year cycle will come into play. (Election years are notorious for being bad for markets … '88, '92, 2000, 2008 … See the pattern?) Use this rally to find solid protection for the portfolio going into 2016. As someone who is usually bullish, it becomes important to spread the word to the other bulls: Protect the portfolio during 2016!

Remember, short-term pain caused by the implosion of OPEC and the liquidation of billions from SWF's will make a basis for the next leg up in stocks but between now and then, things could be very volatile.

Commentary by Jack Bouroudjian, CEO of Index Futures Group LLC, a registered independent broker, and CIO of Index Capital Partners, a registered commodity-pool operator. He was also a three-term director of the Chicago Mercantile Exchange and founder and advisor of UCX (Universal Compute Exchange). Follow him on Twitter @JackBouroudjian.