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Signal & Noise in the Energy Markets

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Teasing out short term trading noise from durable economic news is tricky business.

As I wrote about earlier this morning, a ten dollar per barrel increase in oil price can have an equivalent economic effect of negating $120 billion in payroll tax cuts.

So what are we to make of it when we are treated to headlines such as this one , from the Associated Press: "As Oil Markets Calm, Shares on Wall Street Rise."

The article goes on to report that "effect on stocks has been positive as investors breathe a sigh of relief that the recent sharp rise in oil prices has come to a halt, however briefly"—before explaining that " the fear is that high oil prices will choke the fragile economic recovery."

The DJIA closed on Monday, at its highpoint, so far, for the week, at 12,370. Today, as of the time of this writing, the DJIA is at 12,115. That represents a weekly peak to trough delta of over 250 points.

Those Dow numbers move, of course, based on a complex and distributed set of combined assumptions about macro data and micro (symbol specific) news.

Which is a fancy way of saying indices are collective guesses.

For example: This just hit the tape: "Libyan rebels say control oil fields".

The Reuters article goes on to report:

"Rebels in eastern Libya said on Friday they now controlled most of the oil fields east of the town of Ras Lanuf, and said they would honour oil deals as long as they were in the interest of the people. The eastern Libyan town of Brega and its oil terminal are under rebel control, and soldiers who have defected are helping the rebels to secure the port, Reuters witnesses said on Friday."

How will markets price that news—in combination with the rest of today's events and data.

Well, the short answer is this: Nobody knows.

The reserves in the ground have some theoretical value, based on a given price point of a barrel of oil.

But the coupling—or decoupling—of the intrinsic value versus the discounted present value is what makes the game so fun to play.

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