The U.S. markets were closed on Monday for President's Day but markets around the world were moving lower as the events in Libya spiral out of control. Because Libya exports 1.1 million barrels of oil per day the price of oil has rocketed higher on reports of shutdowns in their oil production. The U.S. WTI rallied to $94.49 and Brent hit $108.70 and a two-year high.

All of this hysteria over Libya is just an excuse to take profits because the impact of Libya on the world economy is negligible. The oil spike is also a knee jerk reaction because OPEC claims to have more than four million barrels per day of excess capacity. If Libya did lose production to either strikes or sabotage it would only take a couple days for OPEC to increase production. It would take longer than that for it to actually hit the market but a statement by OPEC they were going to pump more would calm prices.

The developed nations have 1.6 BILLION barrels of oil in backup inventory for situations like this. That is in addition to the existing supplies used in everyday commerce. If this were Saudi Arabia coming apart at the seams we would have a problem. Libya going down in flames is just a news blip.

Brent Crude Chart

U.S. WTI Crude Chart

The question is what to do in the equity markets on Tuesday. They are obviously going to open significantly lower and we are due for some profit taking. "IF" the S&P futures hold at -16 overnight and IF that translates to a -16 point drop in the S&P that would put us back to support at 1325. I have to believe that is a buyable event because of the number of investors hoping for a decent decline so they can enter the market.

S&P Futures

S&P-500 Cash Index

Remember, Libya is NOT important to the world economy. The real risk here is the possible contagion to Saudi Arabia and Kuwait. So far there has not been any serious demonstrations in either country. Libya was ruled by Gaddafi in a dictatorship he seized in a military coup 42 years ago. He is hated by many, considered an tyrant and a buffoon by most. After turning the military lose on the demonstrators and ordering the air force to bomb the demonstrations he is even more hated today. Even his own supporters are turning against him. Most analysts expect him to be dethroned shortly unless he can hold on to enough military support to murder thousands more. Even that would only be a temporary solution. Once a leader shows that kind of disdain for their people their fate has been sealed. The country is becoming increasingly fractured.

I believe investors will see the future for Libya and realize it really has nothing to do with the U.S. market. After a brief period of decline I suspect the dip will be bought.

The qualification here is the retail trader. If they get knocked out of their existing positions at the open they may pull the rip cord on everything else in a reactionary move. This is exactly the wrong thing to do.

Baron Rothschild, an 18th century nobleman and investor made famous the saying, "The time to buy is when there's blood in the streets." I know it sounds callous but we can't do anything about Libya. A week from now when the market is back in rally mode you can either be glad you were flat in support of Libya or you can be banking some decent profits on your "panic in the street" buys. The choice is yours.

We don't normally have a newsletter on a market holiday but I felt a need to comment on the potential opportunity rather than fixate on the gloom and doom in the news.

Jim Brown

Send Jim an email

Register for my OilSlick.com newsletter and receive free daily updates and commentary on the energy sector. Register here