Inflation's Leading Edge Is Now Oil

By Brad Zigler

Real-time Monetary Inflation (last 12 months): 3.4%*

This week, November gave way to December, despite what your calendar says. November crude oil futures ceased trading on the New York Mercantile Exchange [NYMEX] Tuesday, yielding front-month status to the December delivery.

With that, and other factors, the benchmark price for domestic oil was goosed upward. Wednesday's U.S. Energy Department inventory report showed a buildup in crude supplies, but traders focused more on the big drawdown in gasoline inventories. Gasoline prices jumped and so did crude oil costs. The new nearby oil contract settled above $81 a barrel Wednesday.

Oil now seems poised to test the $90 level following a break to the upside of a four-month trading range. Significantly, oil figures into a downside breakout as well. Yesterday, the gold/oil ratio dipped below 13-to-1 for the first time since August.

August's excursion below the 13x multiple was short-lived—it lasted less than a week, while oil tested, and retreated from, the $74 level.

Gold/Oil Ratio

The August oil rally didn't have legs. The current upsurge does. At least, its stems seem capable of powering a further run-up. The reflation trade's on. Inflationary expectations have been baked into gold for weeks or months; they're now being expressed through petroleum prices.

*Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index from this date one year ago. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.5 percent.

Comments

[tripleblack:]

Oil is going up. So is gold, but at a less volatile march. We will see what the winter brings. I see $90 oil out there when it gets cold.

Oct 23 10:32 AM

[Mad Hedge F...:]

iis Those of you searching for the “new normal” better take a close look at the China National Offshore Oil Company’s (CNOC) efforts to top Exxon Mobil’s (XOM) $4 billion bid for development rights to a giant new field off West Africa. This is only the latest chapter in a global bidding war for essential resources they, and we, need. Long gone is the day when the Standard Oil Company only needed to deliver King Saud a new Cadillac every year to assure rights to his kingdom’s oil supplies, even though it often had to be towed by teams of camels, as there was no refining capacity yet on the peninsula. Decades later, I was part of a SWAT team at Morgan Stanley whose schmoozing kept the crude flowing and the cash surpluses recycling. Having grown up in the desert near Indio, California, I was the only one in the company who actually liked caravanning out into the desert to scoop up cooked rice with my fingers off of giant brass platters, and guzzle illicit Johnny Walker Red, said to be smuggled in by a wayward member of the royal family. I never did get used to the sheep brains, though. But I digress. To the current generation of oil traders, I might as well be talking about the Pax Romana than the Pax Americana, which is now equally ancient history. The hard truth is that they are out there bidding against the new 800 pound gorilla in the market, as are others for coal, iron ore, copper, gold, silver, wheat, corn, soybeans, and myriad other essentials. If you have any doubts about China’s acquisitive determination, look at the chart below showing that the Middle Kingdom’s outbound direct investment is outstripping inbound investment for the first time. Will the Pebble Beach Golf Course next? For you and I, this means we can count on the price of everything to go up in the future, a lot. Keep food, commodity, and energy ETF’s permanently on your radar, like the PowerShares agricultural (DBA), the Rogers International Commodities (RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

Oct 23 12:03 PM

[Erichz:]

Oil will continue to creep up as the cold weather settles in. Here in Midwest the furnaces have been on for a while and that will eventually get natural gas prices finally moving up. Now the east coast is starting to get cold and they use mostly heating oil. The psychological impact of an extended and cold winter will push most energy shares higher. It is only a matter of time.

Oct 23 12:04 PM

[Sevens:]

Could oil top $90 this winter..you bet. But there are at least a couple factors fighting against it here domestically, that being, we're still flush with inventory (tank space at Cushing is precious!) and we're headed into the winter blend season for butane into unleaded that essentially displaces a small share of the crude bbl with butane extracted mostly from raw nat gas.
Other factors fueling the drive up in crude prices, are the simple fact that crude drilling came to a halt (other than drilling required to maintain leases) with the precipitous fall in prices, tight credit and concerns over what this administration will do next.
But all in all, $90/bbl isn't out of the question at all. I think once you hit $100/bbl again, the psychological hurdle of it's impact on the economy and the reverberation of "windfall profits taxes!!!!" in an election year, will make for an interesting '10.

Oct 23 07:05 PM

[BullnBear:]

I think this Oil run is absolutely amazing this year with everything considered and is probably the single biggest indicator of how much trouble the U.S. dollar is in at the moment.

Oct 24 01:01 AM

[bigbear4511:]

Oil

Brimming Supplies (check)
Opec reneging on output production (check)
High unemployment (check)
Rising prices during recession (check)
Frozen wages (check)
Demand for jet fuel down 3.5% (check)
Demand for diesel down 10% (check)
Demand for gasoline
Sept up 6.2 %
Early Oct Up 4.2 %
Current gasoline demand up 3.2%
OVERALL GASOLINE DEMAND IS DROPPING (check) soon demand will be lower YoY
125 million barrels of oil in floating tankers (check)
OPEC says oil at 80$ to expensive (check)
OPEC considering pumping more oil in Dec (check)
Nash Equilibrium indicates incentive to cheat in oil production so countries will pump more oil ( check)
4.2 million barrel production cut down to 62% (from 68%) compliance (check)
6 million barrels of unused capacity in OPEC (check)
Refineries operating at around 80% capacity due to weak demand (continue to lose money) CHECK
Diesel at high inventory levels not seen in 30 years (check)

*under these conditions there has never been an inflated price for a sustained period in 40 years.

BUT OIL IS GOING UP?

www.businessweek.com/l...

Oct 24 08:13 PM

[secmaven:]

More new cars are being sold in China in 2009 than in the US and scrapage of old cars in insignificant. These cars run on gasoline. It is Chinese demand for oil now and in the future that will drive the price in dollars which the Chinese have in abundance. You can forget all of the negative US metrics cited above. Yes, oil is going up.

Oct 25 12:58 AM

[bigbear4511:]

If it does it will sink America.


On Oct 25 12:58 AM secmaven wrote:

> More new cars are being sold in China in 2009 than in the US and
> scrapage of old cars in insignificant. These cars run on gasoline.
> It is Chinese demand for oil now and in the future that will drive
> the price in dollars which the Chinese have in abundance. You can
> forget all of the negative US metrics cited above. Yes, oil is going
> up.

Oct 26 03:07 AM