As we mentioned yesterday, Crude broke its previous high of $103.76.
"The surge in energy prices is taking place as investors seek refuge in commodities to offset a slowing economy and a declining dollar. Analysts pointed out that financial institutions like pension funds and hedge funds are also buying oil and other commodities like gold as hedges against a rise in inflation.
That trend is expected to continue, especially after Ben S. Bernanke, the chairman of the Federal Reserve, signaled last week that he was ready to cut interest rates further to bolster economic growth, despite rising consumer prices.
“When investors lose confidence in the central bank, they tend to look for hard assets,” said Philip K. Verleger, an economist and oil expert. “The Fed’s capitulation on inflation is driving investors to commodities.”
The latest catalyst for the spike in energy prices has been the recent fall in the value of the dollar, analysts said. Currency traders are selling dollars and buying euros to take advantage of the difference in interest rates between the United States and Europe. Like many commodities, oil is priced in dollars on the international market. A falling dollar tends to buoy oil prices in part because consumers using stronger currencies, like the euro or yen, can afford to pay more per barrel.
Apologies if this line of argument looks familiar –we’ve been hitting these notes for quite a long while . . .
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Source:
Oil Tops Inflation-Adjusted Record Set in 1980
JAD MOUAWAD
NYT, March 4, 2008
http://www.nytimes.com/2008/03/04/business/worldbusiness/04oil.html
Barry, do you ever sleep? ;) Economy is really not making people sleepy at the moment but it is impressive to see how late and how early you always post…
Good for your overseas readers though.
Best regards,
Alex
quick note because I woke up really late this morning and I’m rushing around like a nut.
It’s worth mentioning that I use sugar #11 as a currency barometer for a conclusive confirmation of significant dollar imbalances. I like to refer to sugar as the agricultural currency. It is the most widely grown, exported and imported commocity. It is also in a constant state of oversupply. What I’m trying to say, is that “you ain’t seen nutting yet”.
Taking a look at the recent action in the sugar market confirms conclusively that the dollar will soon go into a total tailspin.
200 oil impossible…? 2000 gold impossible…? Naw….
Where are the U S gold reserves…? Are they really there….? I heard that Larry Summers had sold us out back in the early 90s. Is that true…? If not why are we holding on to so much gold. Sell gold,
steady dollar and justify rate cuts.
Best regards,
Econolicious
Smart people, of which I am not one, Please enlighten.
Is this spike mostly (a) readjusting to a falling dollar; (or b) a bet that production cannot be increased right now and demand is going to continue outstripping production anyways ?
Thanks.
Oil, the perfect storm for higher dollar-barrel prices. In no particular order:
1)falling dollar
2)increasing worldwide demand
3)fixed (or nearly fixed)supply
4)geopolitical unrest
5)inadequacies of alternatives
The question going forward is will any of these factors abate anytime soon? Answers?
Very interesting chart.
What does this look like in Euros?
It would take some fancy footwork to back-interpolate the pre-euro years…. so maybe we should do Yen?
My point is… does the “adjusted for inflation” notation account for currency devaluation. Are the Europeans feeling our pain? Looks like a barrel of oil is EU66 right now.
Are commodity price increases limited to imported commodities (‘course, since we don’t manufacture anything but food in the US… that still means most commodities!)?
I still don’t have a clear picture of the relationship between currency devaluation and the apparent inflation.
Also… on the graph… note the April ’80 spike is coincident with a recession. The recession rolled the price over its peak. I think we’re in a recession now and the price might be pulled back down just as precipitously.
I seriously doubt the oil price collapse of the 80’s was a function of our efforts to insulate our homes (as the chart notation suggests). We did a crappy job of it anyway… remember formaldehyde injections?
Note how the peak in the price of oil occurs just as a recession is starting every single time on the chart.
THAT’S BECAUSE INFLATION IS A LAGGING INDICATOR!
A lagging indicator starts to decline AFTER a recession has already stated.
That’s right now.
Do you guys pay close attention to VT trader? I know his/her? posts are some of the best on here (short and to the point).
thanks VT.
me
Comparing quotes:
“When investors lose confidence in the central bank, they tend to look for hard assets,” said Philip K. Verleger, an economist and oil expert. “The Fed’s capitulation on inflation is driving investors to commodities.”
“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”
Ludwig von Mises
How curious that the present situation is comparible to children’s games; first, we had the finacial products “musical chairs”, and now we seem to be playing dollar “hot potato”.
It seems the next game will be “Ring around the Rosie” – and all fall down.
“Is this spike mostly (a) readjusting to a falling dollar; (or b) a bet that production cannot be increased right now and demand is going to continue outstripping production anyways ?”
Since gold/oil ratio is not changing that much, I would go with option “A”.
Economista,
Good point about sugar. The relationship may be changing in so far as Brazil turns their sugar into ethanol.
Why would one have dollar holdings when there is no shortage of dollars? Dollars grow on trees! My book. Sugar, palladium.
Marc Faber pushes the meme of Gold/Oil ratio and shows that either Gold is underpriced or Oil is overpriced since the ratio is at an all time low. The reference is his monthly newsletter which just came out.
As per upthread comment, the peak in oil prices always occurs just before a recession when demand plummets. Will globalization blunt that demand effect this time around. ie, the decoupling principle? Methinks not, but who knows?
Quietly the put/call ratio is climbing back up…..
Another launch pad for a “rally” or have the institutions finally seen the light and went short.
when do they report???? LOL
Ciao
MS
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Considering a lot of time is spent looking at charts here, I find it hard to believe that so many people are overlooking the obvious peaks in oil going into recessions shown in the chart. Fundamentally, aside from background noise, the fact that oil is a cyclical commodity is Energy 101, folks. Unfortunately, speculation, popular press, and politicians have added to the amount of noise. I think decoupling is bunk. Yes, Chindia may not fall off a cliff with the rest of us, but given what is being priced into oil, the risk is at the margin – in this case, the delta of growth (ie. slowing) support coming from EM. Gold I understand as an FX hedge – this is not an input commodity, but rather store of value. When gold prices rise, people’s transportation and heating bills and companies’ input costs don’t rise. At the end of the day, energy is S&D driven. Yes, long term demand far exceeds available supply, but the short-term risks to global demand seem to be ignored.
IMHO all profit and loss perspective on equities must be measured in relation to the copper price.
Why?
Because in a high in flation environment a loss can mascarade as a profit. I don’t recommend gold as a baseline because it is subject to speculation during panics. inverting charts eliminates prejudice if the chart represents reality. The Dow price in dollars IS NOT REALITY.
Thanks for your responses here. Very informative thread.
The chart says it all. There will be a major recession. There has to be one. Oil will fall. All commodities will then also fall. Houses will fall lots further and stay down just like last time. Many fewer baby boomers will have comfortable retirements. It will be up to the next generation the X’s and Y’s etc to find the way through the real crunch.
The recession will be the mechanism that hands over reins. The productive generations will be able to acquire their elders assets…..
PS My comment follows on from MS’s post. Good one Mike!
I can’t believe speculators have given the gift of high oil and gold. I’m 20% short in each as of $101 oil and $975 gold. I’m considering a Euro short as well, as they head into the toilet, and will be forced to lower interest rates, which aren’t all that appealing in the first place. Oil is worth $30 at best within 8 years and gold about $300.
Profits will go into US tech, hopefully at lower prices than here, but it’s looking like the bargain of the decade.
I’m mulling shorting 10-20 year treasuries, (which show no inkling whatsoever of inflation) as a hedge, in case real inflation pops up.
I can’t believe speculators have given the gift of high oil and gold. I’m 20% short in each as of $101 oil and $975 gold. I’m considering a Euro short as well, ……
Posted by: Al | Mar 5, 2008 12:45:20 AM
Great going Al, keep shorting the great commodity bull market… someday you may be right.
The price of oil will always go up!
The price of sugar will always go up.
The price of rice will always go up.
The cost of alternative energy, relatively, is going down.
At what point to we see oil decline as it did in the mid to late 80’s?
And will the world fall for it again and go back to the oil binge?