Buy Oil Here

by: Markos Kaminis

Oil prices took a nosedive since the start of May on concern regarding global economic growth. The demand side of the equation has thus been penalized just as reserve supplies of domestic resources (mostly natural gas) have also been on the increase. So, suddenly petroleum prices turned on a determined path of decline. The United States Oil (NYSE: USO) and the iPath S&P GSCI Crude Oil TR Index ETN (NYSE: OIL) are off roughly 20% each since their May 1st cliff's edge. However, I warn, the same factors that took oil and its distillates higher before the latest slide have not subsided and will again soon spur oil and gasoline prices higher once more. Thus, investors may benefit from dollar cost averaging petroleum relative buys from this point. The shares of Exxon Mobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) are each up sharply today after following the downdraft of oil prices since the start of May, but the ground they might retrace is vast.

The Oil Price Blame Game

President Obama recently raised the issue about speculators' possibly playing a role in driving unwarranted price change in commodities, namely in oil prices. It's a popular topic these near-election days, as petroleum distillate prices reach into the pocketbook of most voting Americans. Namely, gasoline prices have been bothering Americans most, and according to many polls, our countrymen believe the President and Congress can do something about the price of gas. A low hanging fruit, the GOP has of course highlighted the issue as a cause of concern about President Obama and his prioritizing of the environment (they say irrelevantly) over energy, pointing to debate about the Keystone Pipeline. So, it would seem, the President struck back, targeting that mysterious factor which is hard to pinpoint and a favorite pincushion of the 99% of late - Wall Street.

The same thing happened in Europe when economic lies, excessive debt, corruption and inept governing drove European Union member Greece into catastrophe. The mob of course blamed Wall Street first, namely Goldman Sachs (NYSE: GS), for misleading the soft-hearted sheep leading the country, many of whom were stealing away millions in misappropriated funds, into financial catastrophe. However, as every MBA should know, the market is efficient over the long-term and no unwarranted mispricing can thus last long enough to factor. Still, the vague discussion that will ensue in the coffee shops of Greenwich Village and diners across the heart of the nation will place the blame squarely on the usual suspect, that greedy group of traders and hedge fund honchos on Wall Street.

I think the President is playing unfairly here for political purposes, and it's just not right. He said he's going to push to increase regulatory might to stop manipulation. There's nothing wrong with stopping crooked activity, but this begs to question: Who has gone to jail for rating mortgage backed securities triple-A credits deep into the real estate downturn? Why is the rating model employed by Standard & Poor's (NYSE: MHP) and Moody's (NYSE: MCO), where the issuer pays for his rating, still the standard or even in existence? Imagine if a company's stock were rated "strong buy," and you owned it into an abysmal loss, and then later found out that it had paid the firm that rated it a service fee? Do you think that's Kosher? So why is our government finding religion on one issue and losing its faith on a critical one? It's because of votes and tax revenue of course; I'll get into this one later.

The President's pointing to gasoline price gamers forces free market defenders into action. The factors of the price of any security are never singular, and always grammatically in conflict, because there are always many. In this case, let's start with the most obvious.

What led the latest surge in petroleum prices has been the intensification of the geopolitical concern about Iran, its nuclear program, the West's issue with it, and the sanctioning effort to stop it. Iran represents an important source of a critical global commodity, and it also could threaten the global distribution of petroleum through the disruption of its flow at the Strait of Hormuz.

This issue, and also the possibility of secret agreements around the issue that have possibly tied many groups and perhaps even some nations (the obvious are Venezuela, Syria, Hezbollah, Hamas; others are too dreadful to discuss) into strategic or military alliance, are of significance. Up until recently, and for some for just a short while longer, Iran represented an important petroleum source. We are talking about the likes of Greece and India, where disruption could have dramatic consequences. Where China really stands on this issue is likely to become better understood as the horrible effects of any disruption play out. In other words, I worry about, and obviously the petroleum market is bothered by, global economic consequences to the engagement of Iran. While that might lessen demand, severe disruption of the important fuel resource would clearly drive prices much higher. So, it would seem that mindful investors, often known as smart money, have also been aware and investing in line with what the President seems to blame speculation for.

Dilution of Fiat Currency

Blame should also fall partly on the Federal Reserve, which while diluting the value of the dollar, lifts the prices of the commodities it is used to value. Sustained low interest rates and quantitative easing serve an expansionary economic purpose. However, the result, in isolation, is also a depreciated currency against commodities like oil and gold. I say in isolation because nascent weakness in the euro and the yen has acted as counterbalancing weight in favor of the dollar.

But what will happen when those counterweights are lifted away or when the dollar pays for the day's needs? Suddenly the dollar will drop like a rock, spurring hyperinflation and lifting the price of commodities beyond their recent highs. Even if the counterweights are not lifted, the continued dilution of fiat currency value will work against us. As Europe ties itself even closer together, its euro will be more burdened as its economies contract a contagious illness. As economic growth is stymied by misguided and mistimed austerity, even currently manageable debt becomes troubling. Thus, fiat currency globally could become contaminated, lifting the prices of goods, starting with commodities.

Add Some Oil Here

Any way this plays out, and whichever factor takes the lead, the price of oil will rise again without any defusing action to stop it. Political hijacking of the issue only serves to further cloud the view of the truly dangerous factors causing it. Those real driving factors must be mitigated, before risk is realized. Since I'm near certain they will not be, look for this latest oil price break to prove temporary.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XOM, COP, USO, OIL over the next 72 hours.