China's equities led the rout and, in the first six working days of 2016, their prices - as proxied by the Shanghai Composite Index - fell 15 per cent. Running almost as scared is the oil price. 'Crude light', as traded on the New York Mercantile Exchange, fell by 10.5 per cent to $33.2 per barrel. Simultaneously, equities in the world's developed economies experienced a much more studied fall. The S&P 500 index of leading US stocks dropped almost 6 per cent and London's All-Share index fell 5 per cent.
That oil was in the middle of global equities' extremes prompts the question, was its drop the cause or the effect of dumping shares, of which more in a moment. But a clear difference between the price of shares and the price of oil is the degree to which they have fallen from their high point. At its current 3270, the All-Share index is just 14 per cent off its all-time high - 3817 last April. By contrast, the oil price is 75 per cent off its peak - $136.70 in June 2008.
That raises another question: is it time to buy oil - most likely via an exchange-traded fund - for its recovery? This is a pertinent question for the Bearbull Global Portfolio. I sold its holding in such a fund - ETFS Brent 1-month (OLBP) - at £26.54 a year ago. Back then it looked as though I might have sold too late, but with the fund's shares now trading at £12.12, that looks like a good move. As to buying back, there are two ways to examine that - the analytical way and the statistical way.
The former gets more attention, which is not surprising. The natural wish for nice, neat conclusions, for clear links between cause and effect - in short, the deterministic approach - sees to that. After all, it is easier and more interesting to discuss the big factors - the global tectonics - that shape the oil price than to talk statistics.
Thus analysts are preoccupied by the interlinks between shale oil production in the US, which is much more resilient than they expected, the resumption of official Iranian oil exports and the doggedness with which Saudi Arabia is sticking to its production targets. They feel that at some point either shale oil production or Saudi output must give. Yet the fact that so much oil has been produced by so many producers when market prices are below break-even prices - and it continues to be - causes them to doubt that proposition. Their pessimism is deepened by Saudi Arabia's decision to cut diplomatic links with Iran - a move hardly designed to foster consensus within Opec.
Thus analysts can't see beyond the widening gap between global supply and demand and a further increase in the world's oil stocks; this despite the fact that the gap is only ever a slither. In the third quarter of 2015 - the latest period for which full data is available - global demand was 95.4m barrels per day and supply was 96.9m barrels. Put another way, given stable demand, production would have to slip by less than 3 per cent for global oil to be in crisis within six weeks - or that's how the markets would view it.
Meanwhile - and happily for the analysts - the statistical approach urges caution, too. True, the oil price is 75 per cent off its top. Even so, the current price is barely below its very long-term average - $41.7 for the period 1983 to present. Granted, the volatility of the oil price means it's especially tricky to make predictions, but it's not possible - using the stats - to say confidently that at current prices and during the next 12 months there is more upside than downside in the price.
What one can say with more confidence is that, if the oil price remains weak, equity markets will struggle to do well. At least the correlation between the direction of movements in the oil price and in London's All-Share index is fairly strong - over the past 10 years, 40 per cent of their monthly returns have been in the same direction. What's much less clear is which one is the lead indicator - the predictor variable - and which is the follower (the dependent variable). Assume that oil is the predictor and it may tell us something about the direction of share prices, but it tells us little about their likely scale of change.
OK, so hold off from oil at the present, but its time will come again. The other near certainty is that the factors that will drive its revival are in no one's thoughts currently - it's the unknown factors that are the really powerful ones. Which is also a reason to pay more heed to what statistics indicate than to what analysts pontificate about.
