Pain is coming to the pump
After flatlining for months, energy prices are poised to head higher.
A side benefit of the recent bout of market weakness and poor economic data at home and overseas has been the drop in crude oil prices over the last three months.
Since stocks peaked in September on the back of aggressive easing measures by the European Central Bank and the Federal Reserve, crude oil has dropped 15% from more than $100 a barrel to near $85.
But now, for three big reasons, crude oil is poised to break higher.
Reason 1: Oversupply fading
Part of the reason crude oil has been on the slide, especially the West Texas Intermediate benchmark measured in Cushing, Okla., has been the boom in American oil production thanks to the growth of unconventional, shale rock development. As a result, the gap between WTI and Europe's Brent crude benchmark has blown out to more than $22 as Brent trades near $108 a barrel.
The problem is that the growth in American production -- running at near a 25% annual rate right now or some 825,000 barrels per day -- is overwhelming energy infrastructure. Pipelines are full. Storage tanks are full. As a result, producers are turning to loading barrels on trains and trucks with rail shipments running at twice the level seen back in 2010.
Relief is coming in the form of the expansion of the Seaway pipeline from 150,000 barrels per day to 400,000 barrels early next year. Storage capacity is also increasing. As a result, Merrill Lynch expects the Cushing oversupply to drop from around 350,000 barrels per day now to near zero in 2013 before moving into a supply deficit of 300,000 barrels in 2014.
As all this happens, prices will be pushed higher and the gap between WTI and Brent crude will close.
Reason 2: Federal Reserve stimulus
Crude oil prices are sensitive to inflation expectations, which have cooled as economic growth expectations have declined. But now, with the Federal Reserve pumping in monetary policy stimulus at a rate of $85 billion a month, price pressures are building. And they will keep building with the Fed hinting this week that it will replace its expiring Operation Twist program with a $45 billion-a-month QE4 Treasury bond purchase program to accompany its current $40 billion-a-month QE3 mortgage purchase program.
But QE4 will have a larger impact than Operation Twist since it will involve the creation of new money to buy long-term bonds, rather than the selling of short-term bonds to buy long-term bonds under Twist.
Already, you can see the impact. Last quarter, the GDP Price Index increased at a 3% annualized rate -- a level not seen since the summer of 2011 before the debt ceiling standoff and the August 2011 market meltdown.
I expect crude to pop once QE4 is announced.
Reason 3: Dollar weakness
As investors have run for the hills given all the recent market volatility, they've sought out safe havens like the U.S. Dollar. The dollar's strength has undermined crude because it's the most common currency used in global energy transactions. So as the greenback jumped over the past month, crude oil has slid lower.
A combination of fresh Federal Reserve stimulus, falling fearfulness on Wall Street, and a new Chinese government that is less willing to prop up the dollar to hold their own currency down threatens to pull the dollar down off its perch and given energy traders another reason to move into oil.
Disclosure: Anthony has recommended UCO, CAM, VLO, and TSO to his clients.
I found these positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
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As long as his majesty and king is in office. Energy prices will escalate. We have him for the next 4 years or until he gets impeached for the Benghazi cover up. Oh no that would put Biden in the oval office( he is an idiot). Scratch that. It is not supply or demand that is causing the price jumps. The continuing degradation of the dollar that is in play here, and will be until congress gets some balls and puts an end to this no budget ,borrow a trillion every year administration and his free stuff for the masses policies.
I seem to remember O-blah-blah saying that he wanted gas prices to be $8 - $19 a gallon so his "green energy" vehicles would be more affordable. Well, now it seems that he has nothing in his way to accomplish that goal and to hell with the rest of us who can not afford either. Just look at the failed Chevy Volt to see what he want everybody to be driving.
Doesnt surprise me that gas prices are going back up again. Elections are over so prices of course are going to up. Google and look at how gas prices always seems to drop right before election, and then go up directly after it. Seriously look at the 2012, 2008 and the 2004 election season and look at the prices before and after.
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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