Despite a 115 point drop in the Dow on Tuesday (March 24), the stock market continues to ride the wave of a tremendous 2-week rally that has left the blue chip index around 1,000 points higher than its near-term low water mark. Following stocks higher have been the prices of oil and gasoline.

It is not surprising that oil and gas prices are moving in unison with the stock market as it posts gains. The oil sector has been one of the hardest hit during the stock plunge over the last year. Oil and stocks began to drop hard during the mid-summer of 2008 as economic conditions really started to worsen.

Oil posted a very modest gain of 18 cents on Tuesday, but the near-$54 per barrel price of light sweet crude is well above the $32 range that the commodity found itself drawing earlier in the year. Speculation prior to the start of 2009 was for a low of around $25 per barrel. The question now is whether oil, like stocks, have bounced off their bottom and are moving on an upward trend? Or, is the current move just an overaction to government interventions in the credit markets combined with a few modestly successful data reports?

Wednesday in an important day for oil as the government is going to report data about crude oil inventory build ups. Analysts expect a showing of 1.4 million barrels of commercial crude oil in holding. As inventories climbed during late 2008 and early 2009, oversupply along with significantly lower consumers and business demand helped drive prices down. Economists are now watching to see if inventory levels have remained high or if demand is starting to pick up.

The national average price of a gallon of unleaded gasoline dipped to $1.966 overnight according to AAA, Wright Express and Oil Price Information Service. This pushed the price at the pump higher by a penny over the Monday average. Gasoline has risen more gradually in the last month compared to crude oil. Fuel rates are just 5 cents higher than they were a month ago. Remarkably, gasoline is still about $1.30 lower than it was at this same time last year when it was on its way up to the $4 per gallon mark.

So, are prices trending upward, or is the current stock and oil climb a fad? There are certainly competing opinions on this matter. Russia is a country with an economy very driven by exportation of oil and gas. Finance Minister Alexei Kudrin just warned against people in his country getting comfortable with recent gains in oil prices and the stock market. He called the current trend “temporary”. It is definitely possible that American investors have overreacted in the short term based on the deep pit that financial sentiment had falled into. The nature of psychological investing and speculation suggests that emotionally charged investors can get too excited if when “hoping” for a market bottom.

Neil Kokemuller
9:30 PM EST
Tuesday, March 24, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.
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