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Crude Conundrum


Did any one factor cause spike?


I've written on numerous occasions that the effort by many in the financial media to explain everything is both a knee-jerk reaction and formulaic. I think it's important to understand this because of the action on Friday.

There's an element of not being able to understand what happened on Friday that made the session crazier as it moved on. Let's face it, even crude oil bulls had to blush when crude set a one day price move record on Thursday.

So, when crude took out that record and resistance at $135.00 not only was the price in unknown territory but so too was the would-be explanation. Part of the reaction was a dramatic shift in emotions as Thursday's session made it appear to be safe to go back into the water again. There are several headlines that explain what happened on Friday. I've ranked them in terms of levels of importance but none individually or even in total adequately explain last week.

1) Iranian president Mahmoud Ahmadinejad will disappear before Israel does, said Israeli Transportation Minister Shaul Mofaz. Speculators used this comment to spread the rumor there could be an attack on Iran over the weekend, but did anyone really believe that would happen? That's why the feigned worry was on the phony side.

2) ECB Jean Claude Trichet suggested higher rates are on the way. I think this guy sounds more like a politician employing a nationalist platform, but while his comments were irresponsible, they were also telegraphed so anyone that says they were surprised just wasn't paying attention.

3) Supply and demand: Yeah, right. That chestnut doesn't jive with data that shows near term demand has peaked and production has increased.

I must say that at this point we must all be afraid. I generally believe that an orderly rise in gas prices has been more a reflection of the success of the economy, not a headwind, but what we saw last week was anything but orderly. I don't know who's pulling the strings behind the scenes but they went for broke. Maybe they (the string-pullers) know their days are numbered as the political landscape shaping up for the fall is clear.

With the Democratic nomination wrapped up for Barack Obama, it's my opinion that Wall Street, along with the oil companies, drug companies, Wal-Mart (WMT) and any person making a six figure income will become the targets of what I feel will be an incredible movement to somehow punish success and make mediocrity the ultimate virtue.

Click to enlarge

Some of the intended victims of this movement I foresee are trying to make nice and hoping that maybe the fact they have been job creators, life extenders, innovators that have made life in generally easier and provide the fuel that makes it possible for people to get to work and Grandma's house over the weekend.

Then there are the folks that have manipulated the crude oil market. Maybe they weighed the pros and cons from their perspective and figured it doesn't matter now if they play nice so they are going for broke. Obviously what when oil spikes to a one-day record moving up $5.50 its going to grab headlines outside the financial pages. When it shatters that one-day record by trading up $11.00 the subsequent session it goes beyond the headlines and becomes kerosene for the populist movement to forcibly redistribute wealth.

Right now the calls on crude oil serve as both a catalyst and cover for latest and most outrageous move. $150 by July 4th sounds nuts and really is by any measure. Sure, it could happen, especially now that all the oil bears and shorts have been slain or driven into the hinterlands. But going there and deserving to be there are two different things to be sure.

The economic and political fallout from last week will reverberate for a long time, even if crude prices behave normally and begin to give up ground. In the meantime the markets are afraid and the masses are going to be burning torches as they head to the ballot box. I'm a solider for capitalism but I understand the outrages of Main Street. There should be an equal or even greater outrage on Wall Street. Manipulation is part of a lot of facets of life, including the stock market, but this level of greed is asinine and stupid.

Some facts to consider:

  • Once U.S. regular gas cracked $1.00 a gallon back in April 1999 it took 64 months to clear $2.00.

  • After cracking $2.00 a gallon in October 2004 regular gas took 31 months to clear the $3.00 a gallon hurdle.

  • It's been just 12 months since gas has been (mostly) north of $3.00, and it just broke $4.00 a gallon this weekend.

Is oil the next bubble?
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