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Rising oil = head wind
The crude oil price has been scaling new recovery highs over the past few days, with Brent crude now less than $2 away from the roundophobia $100 number. Although oil is marching higher as a result of increased demand, an increasing price also represents a head wind for the economy – almost like an additional tax. Here is why: “Every $1 per barrel rise in oil decreases U.S. GDP by about $100 billion per year, and every one cent increase in the gasoline price decreases U.S. consumer disposable income by about $600 million per year,” said Joseph Lazzaro of Daily Finance. Fundamental indications are that the trend is solidly up, as also reported in a guest post by Dian Chu yesterday (see “Crude oil to bust through on supply concern”). Considering the technical picture of oil, Adam Hewison (INO.com) provides a video analysis, arguing that the price is still in a multi-month trading range. (Although subsequent to producing the video, it would seem that the price looks set to break out.) Click here to access Adam’s presentation. The rather bullish-looking price chart of West Texas Intermediate crude is below.
Source: StockCharts.com 1 comment to Rising oil = head windLeave a Reply |
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By Prieur du Plessis, on January 12th, 2011 posted in: 
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PDP:
I would agree that rising crude oil prices will be a headwind and it is something I wrote about back on 10/15/10 (see:http://thetechnicaltakedotcom.blogspot.com/2010/10/roadmap-for-next-couple-of-weeks.html) and several times since (see: http://thetechnicaltakedotcom.blogspot.com/2011/01/were-off.html).
The bulls will have you believe that it is bullish – a sign of demand, and this might be true. Most likely it is a sign that things have gotten too frothy as too much money is chasing too few assets. Oil is a good inflationary hedge in this case.
A spike in oil will mean market top and recession (most likely) but a modest rise will be a headwind. Equity prices will correct and we start the cycle all over again.