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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Oil Crisis Stagflation Spiral Special

News_Letter / Crude Oil May 20, 2008 - 09:33 AM GMT

By: NewsLetter

News_Letter Crude oil continued to hit its new all time high of $128 today by closing above $127 for the first time, up 96% in 12 months and 165% in 3 years. The impact of the price hike is both inflationary and deflationary at the same time. Inflationary as oil is the life blood of the functioning of global economies and thus resulting in across the board price hikes. Deflationary impacts as the price hike acts as a tax on the consumer from fuel pumps to food stores thus leaving less money in the hands of the consumer to pay for the necessities let alone for luxuries.


The Market Oracle Newsletter
May 20th , 2008            Issue #15 Vol. 2

Oil Crisis Stagflation Spiral Special


Dear Subscriber,

Crude oil continued to hit its new all time high of $128 today by closing above $127 for the first time, up 96% in 12 months and 165% in 3 years. The impact of the price hike is both inflationary and deflationary at the same time. Inflationary as oil is the life blood of the functioning of global economies and thus resulting in across the board price hikes. Deflationary impacts as the price hike acts as a tax on the consumer from fuel pumps to food stores thus leaving less money in the hands of the consumer to pay for the necessities let alone for luxuries.

This is creating a spiraling stagflationary environment, as on its own the western economies could have coped with the oil crisis, but having been hit with the triple whammy of deflating housing markets that itself triggered the bursting of the credit bubble that continues to deepen as banks fail to report the true extent of the crisis on the interbank LIBOR market.

Under historic circumstances one would imagine that in such a weak economic climate, the price of crude oil would start to retreat in the face of growing recessionary forces across the western world. However it is not and the primary reasons for this are:

  1. The surging demand for crude oil amongst the emerging markets, where the anticipated reduction in demand in the west will be far outstripped by the increase in demand from the emerging markets , namely China and India, and to an increasing extent Russia. Crude oil demand continues to grow by more than 1% per annum with no sign that this will be brought to a halt despite the oil price flirting with $130.
  2. PEAK OIL – The rate of increase in oil production is slowing as crude oil becomes harder to find and more expensive to extract. Many of the big oil fields from which oil is cheap to extract are ageing with output reductions already being observed across the oil producing nations big fields. This suggests that crude oil production will peak during the next 5 years. The rising price of crude oil will enable more costly oil fields to be brought on stream therefore oil production may plateau for some years whilst at the same time demand continues to rise. The consequences of which will be ever higher prices and inflationary forces.
  3. The 40% devaluation of the US Dollar during the past 12 months or so has contributed towards the surge in the price of all dollar denominated commodities including crude oil.

Therefore the price of crude oil is not falling despite attempts to increase supply as witnessed by the pressure put upon Saudi Arabia to increase its output that resulted in Friday's announcement of an additional 300,000 barrels of day of Saudi output, which given the market reaction was seen as insignificant.

The clear consequences of a stagflationary environment are most evident in the decline of real interest rates, where even the discredited official inflation measures such as the CPI are unable to offer a positive return to savers. US CPI stands at 2.3% against a Fed Funds rate of 2% and therefore a negative yield on short-term treasury bills. The longer end of the yield curve is much harder to manipulate than the short-end and is correctly discounting higher inflation and the need for rate rises to combat this and hence the 30 Year Bond is yielding 4.375%.

Crude Oil Technical Outlook

Click here for Crude Oil chart

The current phase of crude oil's bull market began with a cross above $100 during late February which targeted a move to $115 (the width of the corrective pattern), crude oil blew through that target towards its current level of $127.50. To say that crude oil is now overbought on a technical basis would be an understatement. The immediate trend is difficult to ascertain as given the fever currently gripping the oil market, the price could exhibit a panic driven spike straight through $130 up through $140 within a matter of weeks. Looking beyond the chance of a possible spike, crude oil seems destined to decline towards the $110 support area to work out at least some of its overbought state. Therefore such a correction could provide investors with a further opportunity to accumulate for the long-run.

How high will crude oil go? That depends on ones time horizon. My expectation remains for crude oil to hit $150 this year, 2008.

To benefit from crude oils inexorable long-term trend towards $200 plus suggests long-term investments in oil companies both large oil majors that remain fairly priced, and the more volatile smaller exploration companies. To spread the risk investors should target investment funds and investment trusts. An alternative is to invest in ETF's that track the oil price directly such as the United States Oil Fund (USOF).

The wealth being accumulated by oil producing countries, that despite a devaluation in the US dollar presents further long-term investment opportunities in the better managed Gulf states, Russia and not forgetting the Canadian oil sands. These economies are expected to boom on the back of huge oil revenues deployed in their industrialization and infrastructure projects, unlike much of the rest of the world, these countries will not need to worry about where they will get their oil from to fuel their economic growth.

Your peak oil investing analyst,

Nadeem Walayat,
Editor of The Market Oracle

In This Issue
  1. Energy Sector: Crude Oil Demand from China , India , Rockets Upward
  2. The Myth of Lower Oil Prices Ahead
  3. Grain Exporting Countries of Africa to Mirror Crude Oil OPEC Boom
  4. How to Survive the Gas / Petrol Crisis
  5. Soaring Gasoline, Diesel, and Crude Oil Prices
  6. OPEC Cartel Scuppering G7 Central Bankers Financial Sector Rescue Plans
  7. Crude Oil - US Dollar Divergence
  8. Seven Ominous Crises: How to Protect Your Portfolio and Profit!
  9. Crude OIl Hits $119- Ways to Profit From Peak Oil
  10. Investment Opportunities in Natural Gas Service Companies
1. Energy Sector: Crude Oil Demand from China , India , Rockets Upward

By: Joseph_Dancy

Long term supply and demand trends continue to keep energy prices elevated. The easiest to locate and cheapest oil to produce on the global scale has been for the most part found. Many of the major older fields are in decline. New production tends to be more expensive to develop, and access to potential fields is increasingly restricted by nationalistic concerns as governments try to control resources to benefit their own citizens. In many areas a shortfall of drilling and production equipment exists.

Read Article

2. The Myth of Lower Oil Prices Ahead

By: Ty_Andros

Confusion reigns supreme as the mainstream financial press throw thoughts and headlines at you as they WISH THEM TO BE, instead of how they truly are. They do this to FLEECE you and get you to invest in products which serve their interests instead of yours. Never, ever invest based upon headlines splashed in front of you. They are almost always false. Daily activity in the markets provides lots of solid trading opportunities, but these opportunities rarely are consistently successful unless it is within the long-term trends and macro economic picture of the GLOBE, not just the G7. Invest based upon the picture within the US and you will be severely injured. The US must only be considered based upon the larger global economic pictures.

Read Article

3. Grain Exporting Countries of Africa to Mirror Crude Oil OPEC Boom

By: John_Mauldin

What countries are truly the have and have nots of the world? Good friend and business partner Niels Jensen of Absolute Return Partners suggests we look at the old equation in a new way? Food and energy resources may be at least part of the definition in the future. In this week's Outside the Box we continue a them I mentioned a few weeks ago: agricultural needs are going to be a new and important force in the world and when coupled with energy may shift the balance of power in the world in strange a different ways.

Read Article

4. How to Survive the Gas / Petrol Crisis

By: Money_and_Markets

Sean Brodrick writes: With gasoline prices up 15 cents a gallon in the last two weeks — and about 63% in the last 18 months — American drivers are feeling a pinch at the pump. Consumers are demanding that Congress "do something" to drive down the price of gasoline.

Two weeks ago, I listed seven things you could do to prepare for $200 per barrel oil . They included tips on getting the most miles from every gallon. Today, I have ideas for how we can get gasoline back to $3 per gallon — maybe even lower.

Read Article

5. Soaring Gasoline, Diesel, and Crude Oil Prices

By: Zeal_LLC

Gasoline, usually taken for granted, is weighing heavily on consumer sentiment today. In the States, the AAA just reported that retail gas soared to an average of $3.65 per gallon nationwide! This all-time record high is motivating Americans to drive less, drive slower, and migrate to more efficient cars to save fuel.

As a student of the markets, I find gasoline fascinating. The impact of its pricing creates far-reaching ripples throughout the entire economy. And since transportation is such a basic necessity of life, everyone monitors gas prices on a regular basis. It is fun to watch and analyze such a widely-followed market.

Read Article

6. OPEC Cartel Scuppering G7 Central Bankers Financial Sector Rescue Plans

By: Gary_Dorsch

The “Group of Seven” central bankers, who control the money spigots in 2/3's of the world's economy, huddled with their colleagues from China and Russia behind closed doors in Basel, Switzerland this week, haunted by the “Crude Oil Vigilantes,” who threaten to unravel G-7 schemes to rescue troubled global banks. Earlier today, the price of West Texas Sweet traded as high as $124 /barrel, doubling from a year ago, and guiding Chicago Corn futures to all-time highs.

Read Article

7. Crude Oil - US Dollar Divergence

By: Black_Swan

We got a fairly decent level of angst mail yesterday, in relation to the series of charts John Ross put together, suggesting maybe the market is telling us the buck has bottomed. Some of the usual conspiracy kooks and some very real and solid reasons why the buck will make new lows again were included in our email box. Thank you to all for your feedback. We always appreciate it and learn from it.

Read Article

8. Seven Ominous Crises: How to Protect Your Portfolio and Profit!

By: Money_and_Markets

Sean Brodrick writes: Many of the investment trends I talk about tend to play out over an extended period of time — for example, the long-term price gains in food and energy. But I see at least seven different crises that could rock your world over the next 12 months.

My intention is not to scare you. I simply want to raise your awareness today, and give you different ways you can profitably hedge your portfolio against these threats.

Read Article

9. Crude Oil Hits $119- Ways to Profit From Peak Oil

By: Martin_Hutchinson

Venezuelan President Hugo Chavez said a few months ago that if the United States invades Iran , we could expect to see oil at $200 a barrel. With oil already approaching the $120 mark, we may get there even without invading Iran.

[Perhaps President Chavez could be tempted out of his chaos-causing rule in Caracas with the offer of a rich and perk-filled oil-analyst's job at Goldman Sachs Group Inc. ( GS )].

Read Article

10. Investment Opportunities in Natural Gas Service Companies

By: Hans_Wagner

To beat the market investors it often makes sense to invest in companies that support the companies that are most directly involved in a top performing sector. The Energy sector has outperformed the S&P 500 for several years. An earlier article examined the key issues driving opportunities in natural gas in the U.S. Natural gas is the cleanest burning fuel and is now trading at a lower cost relative to oil. Demand for natural gas should continue to expand, driven by substitution for coal to generate electricity and for heating. Natural gas is also being used by government and corporate fleets, as it is a lower cost and cleaner fuel.

Read Article

For more indepth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

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