Oil and speculators
Obama is vowing to take ‘speculators’ to task over the increase in oil prices. Over Easter weekend family visits, one of the first topics to come up was the oil market with my sister in law asking me if speculators are indeed to blame for the recent price surge. I said maybe they’re a factor, but so is 1) mideast tension and uncertainty of supplies 2) the relentless decline of the dollar and related price rise of everything priced in dollars (except local real estate) 3) the Japanese disaster and rethinking of nuclear power plants worldwide, 4) the Gulf of Mexico spill and seismic problems with ‘fracking’ (and related tightened regulations) 5) emerging market demand 6) peak oil concerns and the idea that perhaps Saudi reserves aren’t what they were once thought. I’m no expert, but if I were forced to be on one side of the market or the other, I’d have to take the long side (wouldn’t you?)
I also mentioned that higher prices were likely to spur research to make alternatives more economically feasible. In fact, higher prices are probably a more important catalyst for alternative energy investment than any political program.
Attached is a chart of SPX divided by crude oil price (rolling 1st contract). Stocks priced in oil. This ratio had been stable for the past two years, but now is breaking down as oil prices outpace stocks. But seen in this way, it doesn’t look as ominous as the move in 2008, when oil surpassed $140. However, as a portion of median consumer paychecks, oil has become a much bigger factor. From a CNBC article: “With gas prices now standing at about $3.90 a gallon, energy costs have now passed 6 percent of spending—a level that Johnson says is a “tipping point” for consumers. ” http://www.cnbc.com/id/42704213
The idea of punishing speculators has great populist appeal, but every person consumes energy and food, and the idea of stockpiling now because prices might be MUCH higher in the future strikes me as a prudent hedge, even if there is a speculative aspect.
SPX divided by rolling Crude Oil futures contract
