Market Overview

High Gas Prices Headed Back to the Front Page


The American economy is about to get another major shock to the system, as crude oil appears to have completely de-coupled from poor economic fundamentals and is skyrocketing again. This is a major red flag, and at the current rate, stories about high gas prices should be hitting the front page very soon. On Wednesday, NYMEX crude futures have soared another 3.22% to $102.58, cutting through the $100 level like a hot knife through butter.

What is even more disconcerting about crude is the fact that it is moving upwards despite a stronger U.S. dollar. This is noteworthy, because it suggests that the price move is not due to speculators buying oil to hedge against a declining dollar, but rather real, fundamental tightness in the crude market. Over the last three months, the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP), which tracks the performance of the greenback versus a basket of foreign currencies, has risen 4.62%, while at the same time, the United States Oil Fund ETF (NYSE: USO) is up better than 17%, with most of the gains coming in the last month.

One can only imagine where the price of oil would be if the dollar had been falling during this time period. Further evidence of decoupling in crude oil can be seen when comparing its performance versus stocks. In the last month, the USO has surged 16.80% versus a gain for the SPDR S&P 500 ETF (NYSE: SPY) of around 2.60%. While crude and stocks are still trading in a correlated manner, that may come to an end in the very near future - once prices get high enough, crude may start trading inversely to stocks as traders weigh the economic effects of persistently high oil.

Furthermore, given that crude is outperforming in a poor economy, it is hard to envision a situation where prices would not skyrocket if the outlook for the economy were to improve. Such a scenario creates a catch-22. As economists begin to raise their outlooks for the U.S. economy, crude oil will likely react bullishly, thereby dragging the outlook back down.

It is hard to envision a scenario where the U.S. economy is going to accelerate from a stall speed onto a path of strong, sustainable growth when the price of oil is above $100 at the same time that the housing market remains in a depression, unemployment is holding at 9% and consumer sentiment is at multi-year lows. Look for the price of oil, if it continues to hold above $100 (and maybe considerably higher), to become a major news story in the coming weeks.


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