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Even Priced in Gold, Oil Is High

"Well, it turns out that even priced in that “currency,” oil is expensive."

The way I see oil priced is on three factors: in relation to gold at 10-1; plus a supply/security premium that factors in Irani embargos or Katrina type damage; plus the speculative premium, standard bubble of new money jumping on an inflated bandwagon.

In today's terms the above yields a base price of $90, plus about $25 for the recent inventory drop and Nigerian threats, as well as the little posturing dances of Bush, A'jad, and Chavez, and the rest as speculation on where oil will go next week or month, basically momentum players trying to squeeze some gravy out of the commodity bisquit:)

The recent drop in oil, 10%, came from speculative positions unwinding because of jawboning by Fed officials. Oil dropped even though inventories dropped, speculative drop overcompensating for what would normally have been about a $5.00 supply spike.

Thursday and Friday's oil spikes resulted from Trichet hinting that the Euro would strengthen from rate hikes and the unemployment jump suggesting that Gentle Ben would give more rate cuts. No concrete actions in sight, just speculation.

Inflation Triangle Dilemma: Dollar / Oil / Euro

"Let’s start with Europe, thanks to rising oil and food costs, inflation is rising fast in the Eurozone. To combat this inflation, ECB president Trichet said they may raise interest rates next month."

Trichet and ECB have inflation because they also have been devaluing their currency, preferring liquidity injections. When money is printed faster than GDP growth each unit becomes worth less against commodities with intrinsic value, like oil, gold, or wheat.

As for Bernanke, eventually he might realize that inflation is what is weakening the economy, distorting the normal balance of consumer spending by energy and food taking more than their normal share, causing other sectors to have less available. A couple of quick 25 bp rate hikes, to partially undo the erroneous 75 bp cut after the Asian meltdown, would drop oil to $100 and provide a $160 billion annual stimulus to other sectors of the economy without raising deficit and debt and while lowering trade deficit.

For this week, things will be simple. News that increases the liklihood of FOMC cutting rates will sink the Dollar and sppike commodities; news that makes it less likely that the FOMC will cut rates will keep things flat; news that makes it likely FOMC will raise rates will strengthen the Dollar and lower commodity costs. With faithbased fiat currencies the high priest, Gentle Ben, is also the prophet.

Weekly Market Commentary: May 19th - May 23rd

Thanks for the information. Well done.

Why $100+ Oil is Here to Stay

Interesting piece, but I would suggest that oil has risen little relative to gold and that the price increase is almost purely driven by the dollar, as shown by oil being in the fifties when Bernanke was raising rates, then soaring to around a hundred as Bernanke cut rates and the federal budget deficit widened. An easy test for my theory is to see see how much oil rose in CAD or EUR since inauguration day, 2001, when oil was $24, less than a quarter its current cost. For price increases of commodities to be seen as a supply/demand function would require them to appreciate at similar rates worldwide and to be immune to Greenspan/Bernanke rate tinkering.