Sometimes it pays to follow the money. With the economic and political turmoil we are witnessing all over the world, the move in oil prices has been very interesting.
Just a quick recap, European nations are continuing to struggle and investors are balking at investing in their debt unless prices fall and yields rise. In recent weeks, we’ve seen several nations’ debts get downgraded, including Portugal and Hungry, to junk status, with word that France might be next on the negative outlook list. Italian debt yields seem to be setting a record high almost every week.
In the U.S., unemployment is still rampant, with no real sign of growth. Home prices continue to fall, as buyers are overwhelmed with the glut of inventory. Several reports are suggesting that China is slowing, as corporate profits in October were at less than half the pace of the January to September period.
The trend seems to be that economic conditions are getting worse, yet oil prices continue to go up. Also of significant interest is that oil prices have gone up even after the conflict in Libya has ended!
What are oil prices telling us?
As regular readers of Profit Confidential know, we have been ahead of the curve in understanding how the markets really work; what’s driving prices beyond the headlines. Oil prices are operating on several different factors, all of which are driving this move up.
The first is that the level of supply in oil is still tight, even with the end to the Libyan conflict. Less supply means higher oil prices. Until the pipeline from Canada is fully built, the only nation as of right now with significant excess supply of oil and that’s able to pump it into the market quickly is Saudi Arabia. However, with the huge growth in demand from emerging economies like China, this excess supply is now very small and any geopolitical disruption will send oil prices up.
Some say that speculators are pushing oil prices up. Although investors and speculators may be buying, someone has to sell the oil. If there really was a ton of supply, the oil companies would love to sell it at a price they know is expensive. But they’re not; otherwise, oil prices would have collapsed. Instead, the demand for oil grows even in this poor economic state. If the economy were to improve, even slightly, we could see a massive move again in oil prices.
The final push over the short term will be powered by whispers and rumors that further quantitative easing is possibly coming in the next few months. Some reports say that the U.S., Europe, and the UK will all be involved in another massive stimulus package, one that might dwarf the previous amounts. This is only speculation, as no word has emerged from the central bankers.
Following the money, let us see what the big funds are doing. They know that if another huge round of quantitative easing were to occur at the scale some are mentioning that the fresh money would be pumped into the commodities market, especially gold and oil.
When looking at the oil price, now near $100.00, there is no question that massive funds are looking for the price to continue its upward trajectory. All signs point to a strong push into oil, whether you analyze the supply side or the monetary side.
Unless you can dig a hole in your backyard and hit oil, you might as well participate in this next move up in oil prices by investing in high-return/low-risk companies.