Way back in late December of 2008, the price of crude oil settled in around $30 per barrel. Mind you, this price reflected the end of a rise and fall not seen since the days of the Roman Empire. Okay, maybe the historical analogy is a stretch since it took the Roman Empire some thousand years to complete its journey to the top and then to the bottom, whereas the trip up and down for crude oil in 2008 only took about a year.
In July 2008, crude oil topped out at $147 per barrel and, as I said, it closed the year around $30, give or take. For those with short memories, many pundits/analysts predicted in the summer of 2008 that oil would top $200 per barrel by the end of the year, thus completing the pyramid scheme that sucked in many a sucker at the $145 mark. Once again, be wary of prognosticators, especially those with big “investment” titles and or academic letters behind their names. Heed this warning now as oil begins its climb back to lofty heights, but, as you practice wariness, keep in mind that this time around more fundamentals and less speculation power the engine driving the price of oil. Thus, in this current rise, the price of oil more accurately reflects the price of gas, which more accurately reflects the potential for serious inflation.
WASHINGTON (Reuters) – The average price of U.S. gasoline rose above $3 a gallon over the past week, reaching its highest level since October 2008, the Energy Department said on Monday.
Keep in mind that in October of 2008, the financial collapse was in full swing, the recession had bitten the consumer hard as the U.S. was losing hundreds of thousands of jobs per month. In short, we were fast approaching the low of the lows, economically speaking. Today, however, the global economy is moving in the opposite direction and the demand for oil is not dropping; it is rising.
This rise in oil prices is a double-edged sword. One sharp edge is that Bernanke’s gambit to push commodity prices higher to combat deflation is working (speculation drives the wealth effect), and the other sharp edge is that that higher fuel costs promises higher inflation, which could threaten the recovery. Will either edge cut deeply, or will Bernanke be able to thread this monetary needle? This coming year will answer the question. Of this, I am certain.
The point here is that in the short term, oil the commodity is a good play, but as the year rolls on and Bernanke does what he does, or higher interest rates come on their own, watch for a temporary pull back in the price of oil (and other commodities). As the interest rate environment changes, speculators will move money to build new bubbles in other asset classes (equities?). But unlike some other commodities (gold for example), oil will rebuild its base and begin to rise again as the demand will push against the supply, a supply, mind you, highly regulated by those who know their future revenue stream is threatened. For now, though, those “regulators” will try to keep the price stable (rising slowly) and the supply flowing, as this is in their best interest, for now.
Trade in the day; invest in your life …
