I have been watching developments in the crude oil and unleaded gasoline markets with a great deal of interest. This week's numbers from the EIA and other private sources shocked the market due to the extent of the drop in crude at Cushing and sent both markets on a tear higher. Crude is now trading close to $106/bbl as I write this and unleaded gasoline has pushed above the $3.10 mark (remember - that is a wholesale price not the pump price).
Frankly I do not see the US economy as strong enough to support either crude or unleaded gasoline at current prices but right now hedge funds are driving these markets higher and the momentum is strong to the upside. There certainly is no shortage of WTI from what I can see but a goodly portion of it appears to be leaving the US via exports to the EU and elsewhere.
One has to wonder however at one point the spike in gasoline prices at the pump is going to hit Mr. and Mrs. Consumer right between the eyes. You can make a case for rising energy prices being inflationary but you can also make a case for them being deflationary.
In the former case, energy costs are a major input in manufacturing of all kinds not to mention shipping/transportation costs of goods that need to move to market. Think also airlines, railroads, etc. Unless companies are willing to eat the higher costs, they have to raise prices to shore up profit margins.
In the latter case, consumers are not exactly awash with surplus income right now thanks mainly to the moribund labor markets and flat wages. If a larger chunk of their disposable income goes toward transportation expenses ( it is also summer vacation time), that results in them having less to spend at the local Wal-Mart.
I do think that if crude somehow manages to push past $110 (basis WTI) and especially if it climbs through $115, we are going to see some market impacts elsewhere. Let's keep a close eye on this.
By the way, those of you working the grains markets might have noticed the sharp selloff in the beans today. Yesterday's forecast changed and that, in combination with the bearish USDA reports yesterday, finally caught up with the corn and the beans. That might be the silver lining for consumers to help enable them to cope better with rising gasoline prices. If food prices begin to drop, it will take some of the pressure off their checkbooks.
Lots of variables to consider - one thing however is extremely important - gold, and especially silver, need an inflationary psyche to thrive. Right now we have energy up and food moving down. One is tending to cancel the other out. What we have to watch is to see whether or not the two groups will move in sync at some point.
Physical market tightness helps keep a floor of support under gold but it takes a genuine shift in sentiment towards one of inflation to make the yellow metal run. Until the gold shares can put in a better performance than they heretofore have managed to accomplish, I look for rallies in gold to be sold. Bulls are going to have to PROVE that they are determined to drive prices higher before the strong-handed shorts are going to panic.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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