Allergic to One-Hundred-and-Thirty-Dollar Oil
Wednesday, May 21st, 2008
By Michael Lombardi, MBA for Profit Confidential
Yes, crude oil prices hit $130.00 U.S. a barrel this morning. But, unlike other market commentators, it is not the price of crude that concerns me; it is the stock market reaction to it, as the market tells us what higher oil prices will mean for the economy months from now.
As I have written before, up until $125.00 a barrel, the stock market had very little concern for higher oil prices. The Dow Jones Transports, an index comprised of the largest shipping companies in the world, dependent on oil, has been a stellar performer since January. But at $125.00 oil a barrel, the Transports index starts to fall apart.
Oil futures are now at twice the price they were a year ago. Remember that call I made almost two years ago where I predicted $100.00-a-barrel oil in the face of vast criticism from other analysts and even my own readers, because no one at that time could fathom oil at $100.00 a barrel — turns out I was too conservative!
Now, you have major market players coming out and predicting even higher oil prices. Goldman Sachs expects crude oil to reach $200.00 a barrel in two years. Oil man T. Boone Pickens sees $150.00 a barrel this year. When I read and hear about these kinds of predictions about the price of oil, I again start to take a contrarian view. I don’t want to run with the crowd. And right now that crowd is saying that oil is headed for between $150.00 and $200.00 a barrel.
Can the U.S. economy take oil at the low end of the forecast, $150.00 a barrel? Definitely not; that’s what the stock market is telling us. As a market veteran of 26 years, my opinion is that the higher price of oil is the single biggest deterrent to the stock market right now. If oil prices maintained below $120.00 a barrel, we would be witnessing a much stronger stock market.
What’s causing oil prices to rise so rapidly?
Everything I am reading this morning in the newspaper and the Internet is about how strong demand in China, especially for diesel, is spurring prices higher. I have a different view, though.
As I wrote a couple of weeks ago, oil producers are getting pathetically richer on high oil prices. The major American oil companies collectively made more than $50.0 billion in profits in the first quarter of this year — that’s over half a billion in profits a day! What other industry makes that kind of money today?
But I believe that Abdullah al-Badri, OPEC’s Secretary General, said it best the other day when he told a Reuters reporter that the weak U.S. dollar could keep pushing oil prices higher. Let’s face it; the U.S. dollar has lost 40% of its value against a basket of major world currencies in less than five years. Would oil still be trading at $130.00 a barrel if the U.S. dollar didn’t lose any of its value over the past five years? Of course not!
Tomorrow, I’ll tell you exactly why the stock market is worried about the high price of oil and what I believe the big surprise for investors could be.
Next Post: GDP Decline a Blip on the Radar in ChinaPrevious Post: Hands Off Financial Stocks
Tags: oil prices, stock market, U.S. dollar, U.S. economy
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
