"The commodity looks like it has legs, which is trader talk for its
going higher. While I do not make a habit of forecasting commodity
prices, $110, and then $125 are our next two targets.
I got your core inflation right here . . ."
That was our March 3rd quote on energy prices.
As Bloomberg reported this morning, Crude was $125; As I write this, CNBC is flashing that Crude is over $126 a barrel.
We have been Bullish on Oil and energy stocks for a long time. Our first recommendation of Crude Oil was back in 2003, when the price broke out over $32 per barrel. I picked Energy as my favorite sector for the Business Week forecasts for 2004 — something that more than a few people ridiculed at the time.
Early on, we recognized that it was Chinese Oil Demand underlying the increase in cost. We also looked at why Refining Capacity was a problem. We have examined Global Crude Oil Demand & Gasoline, we looked at Oil: Inflation adjusted.
We looked at whether Oil Jitters Gotten Overblown?. That answer was no. We also looked at the question: Do Higher Oil Prices Lead to Recessions? Turns out the answer is yes. Large Hedge Funds who had been ignoring our bullish energy advice did so at their own peril.
So where does that leave us in 2008?
Well, we have political considerations with the US presidential elections, upcoming Summer Olympics in China, an ongoing war or 3 in the Middle East, and of course, a weak dollar (which is now in a counter-trend rally).
Let me offer one last way to think about Energy: Its relative strength versus precious metals.
As the dollar has strengthened, precious metals have gone south. Yet Crude oil has continued upwards, implying that this is more than a mere currency story.
Dennis Gartman writes:
"All things being equal, if one were to hear that crude would be $2/barrel higher and then were asked how much stronger gold would be, one would answer, swiftly and with confidence, "Oh, at least $5-$10/ounce." Wrong!! Gold’s down $6/oz, sending the gold/crude ratio to new lows for the past several years. At the current levels, it now takes 7.06 barrels of crude to "buy" one ounce of gold. 15;1 is rather more "normal."
Have a look at this ratio in a 3 year chart:
graph via Stockcharts
I’ll see if I can find produce a longer term chart of the ratio above — it might be revealing.
Its funny, but I got a lot of grief over an $86 forecast several
years ago — but $125 was pretty easily accepted. That implies a major
change in psychology is taking place.
More on this in the coming weeks . . .
The Gartman Letter
Thursday, May 8, 2008
Crude Oil Rises to Record Near $125 a Barrel on Supply Concern
Grant Smith and Christian Schmollinger
Bloomberg, May 9, 2008
Unlike the Federal Reserve, Trichet and the EC are very concerned with high Inflation:
Remember, the EC has a single charge — maintaining price stability — and is not concerned with maximizing growth . . .
Trichet Sees `Rather Protracted’ High Inflation
Gabi Thesing and Christian Vits
Bloomberg, May 8 2008
Yesterday, I wrote: “David Leonhardt’s NYT columns are oftentimes insightful and illuminating. Unfortunately, today’s column is not one of those times . . .” I promised readers (and David) an explanation. Consider this it. First off, I interpreted Leonhardt’s column as really two distinct issues — one psychological, one statistical. He got the first one…Read More
Click for Video
Federal Reserve Chairman Ben S.
Bernanke, seeking to end the worst housing slump in 25 years,
urged the government and mortgage lenders to intensify their
efforts to avoid home foreclosures.
Bernanke, in a speech in New York today, also reiterated his
call for lenders to forgive portions of mortgages for some
struggling homeowners. He said proposals should be “tightly
targeted” at borrowers at greatest risk of losing their
properties, and avoid providing an incentive for defaults.
The Fed chief also backed the idea of having the Federal
Housing Administration refinance troubled mortgages, a concept
included in Democratic legislation in Congress, without
explicitly endorsing the bill. His remarks indicate a gap with
the Bush administration, which has preferred to rely on industry-
"Realistic public- and private-sector policies must take
into account the fact that traditional foreclosure-avoidance
strategies may not always work well in the current environment,”
Bernanke said in remarks to a Columbia Business School dinner.
Bernanke Urges Action to Avert Further Foreclosures
Scott Lanman and Alison Vekshin
Bloomberg, May 5 2008