Crude Bubbling Up

Crude oil has been on a tear, with WTIC approaching $88 a barrel and Brent topping $90. Normally this would be a symptom of inflation, that is dollar depreciation, but at least in the short term, this is not the case. This surge in oil prices is real.

We’re not seeing a broad rise in other real time dollar denominated prices, which would indicate a decline in the dollar itself. To the contrary, US stocks are down, XS stocks are down, copper, gold, silver & platinum are all lower. Such across the board declines indicate a move higher in the dollar. This is also reflected in the forex markets, where the dollar index has risen as well.

So it really is about the oil. It’s rising against a rising currency. What are the implications?

It’s chancy to read a lot into it given the youthful age of the trend. Production cuts in oil producing countries are meeting strong consumption. Such trends can appear and disappear without having much lasting impact. We make this observation despite our long term bullish disposition on energy prices. But a similar case can be made for other hard commodities like copper, given its potential demand for “clean” energy. 

And any renewed dollar weakness – another long term likelihood – would only add to nominal price increases. So either this oil rally abates or other prices recover to play catch up. Timing is always the biggest challenge, but given the interest rate cycle, deflationary tailwinds could appear before the sustained bullish undercurrents reassert their dominance.

2 thoughts on “Crude Bubbling Up

  1. jk says:

    in the short to intermediate term it is a bit worrisome how much the oil rally has depended on saudi [mostly] and russia [a little] controlling production to goose the price. in the longer run the effects of e.s.g. in restricting capex, and the discipline that producers learned after the non-profit shale boom, is enormously bullish for energy in all forms. i’ve focused some on oil services, especially offshore such as tdw and val, because of my concern that there will eventually be “excess profits” taxes on the producers themselves. the other option is to own the commodities themselves, which can be done with dbe, uso, bno and for uranium sruuf.

    1. Bill Terrell says:

      Thanks JK. Energy is covered in our Model Income Portfolios too … the commodities fund COMT tracks the S&P GSCI which is mostly energy and has gained over 15% in the past three months. Energy bulls can of course overweight the position or add dedicated favorites. It also happens that energy tends to be overweighted in most of the value and dividend oriented ETFs as well.

      FWIW I’m bullish on hard assets in general, aside from the potential deflationary squall noted in the post. Should it come to pass that would be a 2024 event if not sooner, though, so if anything an opportunity to position for the longer term. This is a long held view … I highlighted a bullish outlook on commodities at the beginning of the decade:

      “Next decade? I’ll say all that turns on its head. Commodity prices soar. Foreign stocks, left in the dust for most of the 2010s, outperform US stocks. Value outperforms growth. The inflation that the Federal Reserve has been agitating for – and which has been building but not yet becoming as obvious in conventional metrics like the CPI – will finally start to show up even in such lagging measures.”

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