Stocks Fall As Oil Hits $115/Barrel On Iraq Crisis

Only a few things have thrown the S&P off its track over the last few years and one of them is crude oil. This is especially true when there is rising global tension. Yesterday crude oil futures jumped and the S&P futures SPU sold off.

I had been talking about the E-mini ESM sell stops that went from 1940.20 down to 1936.00, which was the first real level of sell stops.

But even before the ESU14 “collapsed” through that level, the premium between the S&P futures ESU and the S&P cash (SNP:^GSPC) was already stuck at sell program levels. With the news algos and an abundance of sell stops below, it was easy pickings to the downside.

$115 Crude

Overnight Brent crude oil traded near a 9-month high at $115 a barrel as the United States and its allies threatened military action against Islamist militants who have taken over cities and towns across Iraq, raising concerns over Iraq’s oil exports.

The IEA (International Energy Agency) played down the fear over the possible loss of oil exports and said in its monthly Oil Market Report that supplies did not appear to be at risk for the moment. “Concerning as the latest events in Iraq may be, they might not for now, if the conflict does not spread further, put additional Iraqi oil supplies immediately at risk,” the Paris-based agency said.Also overnight the “jihadists” continued their push toward Baghdad and are now within a half-hour drive of Iraq’s largest city. On Thursday, U.S. crude oil hit an intraday high of $107.68, a fresh 9-month high, extending the previous session’s gains of $2.13.

The IEA said on Friday that OPEC would need to produce one million barrels per day (bpd) more oil on average in the second half of 2014 to balance the global market, which will see a steep seasonal spike in demand.

Not Surprised

While the markets took the news as a surprise, we are not at all surprised with what’s going on in Iraq. The U.S. was unable to stamp out the insurgency and when the U.S. left Iraq and the Maliki government began systematically oppressing the Sunni minority, we knew it was only a matter of time until the fighters returned.

The Islamic State of Iraq and the Levant (ISIL) are hardened pro-Sunni fighters and have no intention of turning back. The Iraqi army, for its part, is composed of Shia and Sunni with a high desertion rate and little loyalty.

When 800 ISIL fighters attacked Mosul, 30,000 Iraqi soldiers, two divisions, simply “turned tail and ran,” according to The Guardian. The U.S. is being pushed into responding and has threatened military airstrikes, even as Iran has sent an elite force to help strengthen the Iraqi government, composed of fellow Shia. It’s a bad scene and it’s going to get worse.

The Asian markets closed modestly lower and in Europe 11 of 12 markets are trading lower. On today’s economic and earnings schedule are PPI-FD, consumer sentiment and earnings from Multi-Color LABL, Volt Information Sciences VISI, and Culp CFI.

Our View

The S&P has been looking for a reason to go down for the last few weeks and the Islamic State of Iraq and the Levant (ISIL) taking over Iraq is more than enough.

The S&P has always reacted to sharp moves in crude oil and we do not think this is over. The U.S. will have to step in and that will only add fuel to the fire.

Our view is that we see a retest of yesterday’s lows; sell the early rallies with the idea of looking for the Thursday / Friday low the week before the expiration.

Gotta love the MrTopStep videos.

• In Asia, 6 of 11 markets closed lower: Shanghai Comp. +0.93%, Hang Seng +0.62%, Nikkei +0.83%.
• In Europe, 11 of 12 markets are trading lower: DAX -0.90%, FTSE -1.05%
• Morning headline: “Crude oil jumps to $115 a barrel on Iraq crisis”
• Fair value: S&P -834, NASDAQ -8.36, Dow Jones -81.60
• Total volume: 1.66MIL ESM, 770K ESU; 30K SPM and 26.5K SPU (mostly spreads) traded
• Economic calendar: PPI-FD, consumer sentiment and earnings from Multi-Color LABL, Volt Information Sciences VISI, and Culp CFI.