Why Did Crude Oil Spike So High?

Gold

The short retracement on spot gold signals a continuation of the rally. Breakout above resistance at $950 would indicate another primary advance to test of $1000; respect would signal another test of primary support at $850. A correction that ends above $850 would be a bullish sign.

Crude Oil

There has been much debate in the last week over causes of the recent spike in oil prices.

• Oil tanker leasing rates have apparently trebled since April as Iran and Venezuela stockpile crude oil, restricting supply in anticipation of even higher prices in the months ahead (World-check).
• Low interest rates from the Fed have reduced the carrying cost of stockpiling various commodities.
• Expectation of rising inflation has also fuelled demand for investment in real assets. With the housing market in a state of collapse and equities facing a recession, commodities remain one of the few viable options.
• The growth in commodity index funds from $13 billion to $260 billion over the last 5 years shows a close correlation to rising commodity prices, according to Michael Masters in testimony before the Congressional Subcommittee on Homeland Security and Governmental Affairs. Masters, a hedge fund manager, appealed to Congress to end the practice of index speculation.

The only obvious answer appears to be to slow the economy, thereby reducing demand and inflationary pressures. The Fed cannot raise interest rates, however, without exacerbating the housing crisis and further damaging the already vulnerable banking system. So $150/barrel or $200/barrel oil may be the least painful way of achieving this.

July 2008 Light Crude broke through resistance at $130. Narrow consolidation above the new support level would warn of another sharp rally. Reversal below $130 would be healthier, testing support at $125 and establishing a more solid base for the up-trend. A word of caution: rising trendlines show an accelerating up-trend, or self-reinforcing cycle, which is likely to culminate in a sharp upward spike — followed by an equally sharp drop as the market corrects from its excesses.

The long-term chart of Brent crude gives a similar warning of an accelerating up-trend, with price breaking above the upper border of the trend channel. Further steep gains would warn of a blow-off spike.

Currencies

A small pennant on the euro signals continuation of the rally and a test of $1.60. Reversal below $1.57, while unlikely, would warn of a test of primary support at $1.53. In the longer term, expect consolidation between $1.60 and $1.53. Central banks are likely to intervene, strengthening resistance at $1.60, to prevent further appreciation of the euro against the dollar.

The greenback is consolidating below 106 yen. Upward breakout would warn that the primary down-trend is weakening; while failure of short-term support would signal another test of 100.

The descending triangle on the monthly chart is a bear signal, but we could see support at 100 yen strengthened by central bank intervention.

The Australian dollar formed a pennant after breaking through resistance at $0.95, signaling continuation of the up-trend. Abolition of the 10% Interest Withholding Tax on Australian semi-government bonds should see increased interest from offshore investors. Expect a test of parity in the weeks ahead.

The Aussie encountered strong resistance at 100 yen, but narrow consolidation below the resistance level is a bullish sign. Breakout would offer a target of 108. Reversal below 96, now less likely, would signal a test of long-term support at 86/88.

Comments

[sivere:]

At this juncture in history, we are getting hit with multiple punches simultaneously. We have a speculative bubble unlike anything we have ever seen (i.e., tulip bubble, etc.). This bubble CREATED the housing crisis. We have a serious energy problem, caused at least by a combination of US foreign policy (Iraq invasion), middle east geopolitics (related to the first point- Iran vs. US and Israel, Israel vs.the rest of the middle east, US support for Israel, Europe vs. US, etc.). Add to that the dynamic growth in China, India, and Asia in general, vying for the same oil, with no easy way to crank up production, plus an at least temporary food shortage, and we are potentially in a heap of trouble.

Now the peak oil folks are saying, 'see, we told you so' (high gas prices, political turmoil), and the environmentalists are saying ,' see, we told you so ' (food shartage, storms, bad weather).

We need to keep cool heads at this point. First, there is evidence enough that the various political situations, including relative falling petroleum supply (i.e., we cannot just crank up oil supply to meet demand) coupled with a panicked rush to commodities due to the financial collapse and various derivative contracts, shorting, etc. are big factors in the energy issues.

Now, peak oil eventually may be real, and with half the world waking up and developing, we need to take the underlyiong theory seriously. I think $120+ barrel oil may end up saving us IF we act NOW to start developing alternatives. We need tax incentives, government sponsorship, as well as good old American ingenuity to kick in NOW.The $120/barrel oil creates the economic framework to make alternatives possible.

This is not the time to give up as some of the more liberal peak oil advocates imply we should. A wise Catholic Saint once said something like 'Know that God can do anything, but act as though He will do nothing'. Let's not forget there is a God, and He could be testing us, He could be punishing us. We do not know for sure. But do not give up. Turn back to some of our basic Christian values (and natural law in general), think about what we are doing and why, and let's roll up our sleeves to solve this issue- not just prepare for the end, and hide in the wilderness. It is not all criticism for the more liberal peak oilers- some of their ideas about reviving urban living are not all bad, and make sense certainly in the short to medium timeframe. Much of their criticisms of suburbia deserve some consideration.

Let's also not get all tied up with Gore gloom and doom over highly speculative theories about disasterous human induced CO2 warming of the planet. In fact we may be headed for a little ice age! Let's develop any energy source we can, and not let the environmentalists tell us (especially the U.S., China and India which have extensie coal reserves) that coal is out because of the CO2 problem. This is pure insanity at this juncture. If the peak oil problem is allowed to play out because of our inaction, you will see an environmental disaster of unimagineable proportions. Even the anti-Christian Malthusian Darwinists could not create a scenario so hororible (though God knows they keep trying).

Turn back to basic values, including. God, country and family, roll up your sleeves, do not give up, and let's work together (with the rest of the world) to solve the problems ahead of us.

siv0.com
TakeBackTheFed.com

2008 May 28 12:39 PM

[Diyg:]

There is only one solution to the oil crisis: reduced oil consumption. This, like most homo sapien solutions, will involuntarily occur. There is no forseeable replacement for oil in the quantities we have grown accustomed to using. We are entering uncharted terriroty - to coin a phrase.

2008 May 28 03:30 PM

[Dr. No:]

I am with sivere: Let's all go pray. That has really worked last time when my portfolio was in the dumps. Also, praying helps with any diseases (read the bible if you do not believe) and food, like I pray and there is food. It really works!

2008 May 28 06:22 PM

[David in D:]

Sivere- I actually agree with what you said, but I have a hunch for very different reasons. A cursory look at decent Christian theology will rapidly expose the problems with the "God as vending machine" ideas that are often espoused from pulpits and mildly from your post. I don't think God is interested in bringing oil prices downward, nor could God do so given the fundamental problems with human nature (in terms of our fundamental theological anthropology).

But, like I said, I do actually agree with you. A renewal of deep and abiding spirituality might raise the consciousness of Americans (and others) to a level where we live much more intentionally. As we do so I think it is plausible that the disease of rabid consumption will be tamed and we might realize that we really don't need to drive the Chevy Suburban back and forth to mall five times a week and we really don't want to eat chemically-laden fruit from Mexico and do in fact see the value of locally grown, organic produce (all of which would reduce our consumption of oil thus reducing price and simultaneously improve our health). My point is simply to say I think you are correct in seeing our current fiscal issues as being tied to spirituality, but God isn't a vending machine. God is, and most good theologians agree, the creative force by which we come into greater awareness which is what I think we need here. My guess is that you are intuiting toward this yourself; am I correct?

Best wishes.

2008 May 29 01:30 AM

[jjason:]

Please, God has nothing to do with the price of oil. It's the cartel, stupid.

David Kotek from Cumberland Advisors in NJ. posted a newsletter where he gives the GOVERNMENTS THAT CONTROL MORE OIL THAN XOM.

They are not all in OPEC. OPEC is a monopoly that is part of the problem. I agree that consumption and lack of drilling in the US is also part of the problem.

And SPECULATION IN OIL FUTURES is also part of the problem.

Finally, if you don't want our economy to suffer from high oil prices, start somewhere to solve the problem. I did. I am buying less oil and gas and heating water with solar energy...and I did not buy an oil-related hedge fund, oil futures contracts or go long or short oil.

But I have invested in oil stocks and sold them all because I see a bubble burst coming.

I hope the speculators are put out of business by new laws.

2008 May 30 11:10 AM