The Oil Fallacy

Oil is holding above $86 a barrel. And yet analysts still cling to the notion that oil should be driven by the U.S. economy.   

Here’s a quote from a report from Frankfurt’s Commerzbank:  We think that the oil price increase is only of temporary nature, since it is driven by liquidity rather than by fundamental factors…The recent increase in correlation between oil prices and equity markets, which has now reached unprecedentedly high levels underscores our view.   

I’m not sure how Commerzbank comes to the conclusion that oil prices are somehow not connected to fundamentals, but, instead, are connected to the stock market. But this stance is highly suspect.   

Oil has proved it can trade independently from the U.S. dollar. That’s a far bigger catalyst than the stock market, because it affects oil’s relative value.   

And besides, the U.S. is no longer the biggest oil consumer in the world. There’s no reason to think our stock market should control oil prices.   

There is one analyst who at least understands the implications of oil at $86. Olivier Jakob of Petromatrix, says:   

The economy recovery of 2009 was fueled with crude oil at $62 a barrel, not at $90 or $100 a barrel and we fear that the latest run on (the Nymex contract) will be the kiss of death for a global economy that was trying to avoid the possibility of a double-dip recession…   

Higher energy prices will soak up cash that might otherwise be spent on goods and services. That’s not good for an economy with nearly 10% unemployment.   

The Greek bailout story isn’t over yet. It’s like a bad horror movie, where the bad guy just won’t die. Market News International is reporting that Greece may now want to bypass IMF involvement in its bailout.   

I had to read that article a couple times, to make sure I got it right. Wasn’t it Greece who was asking that the IMF be included in the bailout to keep borrowing costs down?   

Greece is sending more than mixed signals. It’s acting downright schizophrenic on this bailout matter. I don’t know why any investor would consider Greek bonds at this point. There’s just too much uncertainty.   

This new twist has hit the euro and sent the U.S. dollar higher.   

It may not seem important, but don’t overlook the fact that Australia raised its interest rates last night. And the central bank warned rates will move again to combat rising inflation and home prices.  

This move may be beneficial to the U.S. economy in the short-run. It will certainly help keep the dollar weak. But central banks around the world are moving to reverse stimulus policies and reign in liquidity. The U.S. will have to follow suit at some point.   

Clearly, high unemployment is keeping a lid on wage inflation, the Fed’s favorite measure of inflation. But if gains in nonfarm payrolls continue, it will mean U.S. interest rates will rise sooner than later.   

The coal stock in the Energy World Profits portfolio is ramping 10% today on an analyst upgrade. It’s up 39% since I initiated a buy on the stock, and I expect at least another 30% gain in the near future.   

I continue to believe that energy and oil stocks are a must for any investor. If you haven’t checked out Energy World Profits, you can do so HERE.