Oil Prices, Gold, and the Stock Market: Is Everyone Wrong About 2026?

Key Concepts

• Supply Glut (Oil): A situation where the supply of oil exceeds demand, leading to price declines.
• Break-Even Rates: Inflation expectations derived from the difference between nominal and inflation-indexed bond yields.
• Shadow Fleet Tankers: Vessels used to circumvent sanctions by transporting Russian oil.
• OFAC List: A list maintained by the U.S. Office of Foreign Assets Control of individuals and entities with whom U.S. persons are restricted from doing business.
• Economic Policy Uncertainty Index: A measure of uncertainty surrounding government economic policies.
• Yield Curve Flattening: A decrease in the difference between long-term and short-term bond yields.
• Basis Points: A unit of measurement used in finance, equal to 0.01% (1/100th of a percentage point).
• Hodler: A term used in the cryptocurrency community to describe someone who holds onto their cryptocurrency for a long period of time, regardless of price fluctuations.

Market Overview & Initial Price Action (January 17th)

The markets experienced a modest rebound following news suggesting limited direct US intervention in Iran. The S&P 500 rose 0.23%, and the NASDAQ gained 0.26%. Bond yields increased, particularly at the front end (up 1.54%), a move seemingly beyond pure risk-on sentiment. The US dollar strengthened against the Euro and Yen, while gold experienced a slight decline. Crude oil saw a significant drop of 4.77%, a move that prompted questions about its underlying drivers.

Reassessing the Oil Narrative

The recent decline in crude oil prices, while initially attributed to easing geopolitical tensions, requires deeper analysis. The protests in Iran began on December 28th, but market reaction intensified recently. The core question is whether the pullback in oil and gold reflects a genuine easing of risk or a recalibration to a longer-term issue. Analysis of CL futures charts reveals a sustained decline since the mid-year spikes related to the Israel-Iran conflict.

The Supply Glut Assumption & Potential Shift

The prevailing market assumption has been a supply glut, with the Energy Information Administration (EIA) forecasting flatlining global oil consumption alongside a continued supply exceeding demand through 2028. The EIA initially predicted WTI prices could dip to $50/barrel, even as low as $49.50, and stabilize around $50. However, the recent price action suggests this assumption may be breaking down. The price has bounced off the breakout level without overturning it, hinting at a potential extension upwards.

US Disruption of Russian Oil & China's Supply Chain

A critical, previously underestimated factor is the US’s disruption of Russia’s “shadow fleet” of tankers used to circumvent sanctions. The US has seized six tankers, and Venezuela is also being targeted. This poses a significant threat to Chinese oil supplies, as China relies heavily on these sources. If China is forced to seek alternative supplies from the Gulf states (Saudi Arabia, Iraq), it could create a squeeze on the market, potentially driving prices higher over months as China adjusts its supply mix. This dynamic was largely absent from market considerations.

Inflationary Implications & Bond Market Signals

A sustained rise in oil prices could reignite inflationary pressures. Break-even rates, reflecting inflation expectations derived from the bond market, are already on the rise, correlating with the increase in crude oil prices. This shift in inflation expectations impacts the outlook for interest rates and the Federal Reserve’s policy decisions.

Fed Expectations & the Yield Curve

Markets continue to demand more rate cuts from the Fed than the Fed itself anticipates. Previously declining inflation expectations are now reversing. While the market still expects roughly 50 basis points of cuts this year and next (in line with the Fed’s guidance), there’s a divergence in timing, with the market favoring front-loaded easing. The outlook for 2027 has shifted from slightly positive to negative regarding rate cuts, suggesting a growing recognition that cuts may be delayed.

Gold's Resilience & Geopolitical Hedging

Despite the oil price reversal, gold continues its upward trajectory, seemingly independent of dollar and yield movements. This suggests gold is functioning as a “third, non-sovereign way to transfer value” in anticipation of escalating tensions between the US and China. Past instances of US economic pressure on companies like Huawei demonstrate the potential for broader trade restrictions and the need for alternative value stores.

Economic Uncertainty & Global Trade

The Economic Policy Uncertainty Index, compiled by Fed economists, indicates current levels of uncertainty are comparable to those seen during the COVID-19 pandemic and the 2008 financial crisis. This heightened uncertainty contributed to a decline in global trade volumes last year, a factor supporting stock market performance.

Stock Market Performance & the S&P 500

The S&P 500 has struggled to surpass its October high, hampered by economic uncertainty and the desire for Fed support. Fed Chair Powell’s comments in October, tempering expectations of rapid rate cuts, contributed to this resistance.

Yield Curve Dynamics & Potential Trend Change

A potential trend change is emerging in the bond market, particularly at the long end of the yield curve (30-year note), suggesting the market is adjusting to the possibility of delayed but ultimately larger rate cuts. The yield curve is flattening, with the front end rising more significantly than the long end.

Positioning & Outlook (Millius Peac’s Strategy)

Millius Peac’s current positioning includes:

• Long Gold: Maintaining a long position in gold.
• Long USD vs. AUD, GBP, EUR: Long the US dollar against the Australian dollar, British pound, and Euro, with added positions.
• Long Bitcoin (Opportunistic): Long Bitcoin, viewed as a speculative trade with a defined expiration, not a long-term investment.
• Short Risk (Put Verticals): Short risk exposure through put vertical options on the NASDAQ and S&P 500.
• Long Bonds (Long End): Long positions in long-dated bonds.
• Long Crude Oil (Call Verticals): Long positions in crude oil through call vertical options.

Conclusion

The market landscape is shifting as the initial assumptions about 2026 are being challenged. The oil narrative is evolving, with the potential for supply disruptions and inflationary pressures. While the Fed’s policy path remains uncertain, the bond market is signaling a potential adjustment to delayed but larger rate cuts. Geopolitical risks, particularly concerning US-China relations, continue to drive demand for safe-haven assets like gold. The key takeaway is that the market is recalibrating to a more complex and potentially volatile environment, requiring a nuanced and adaptable investment strategy.