Vancouver Investment Advisor Ritch Wigham

What’s The Deal With Crude???

Part two of three:

As we talked, in the piece I did on crude, a couple of months ago, crude can and is a commodity that isn’t really a commodity at certain times. Now is one of those times.

As you may recall I suggested that crude would trade in a range of $42 – $50 dollars with a bias to the upside .My direction was right but I didn’t factor in my own rules on why crude isn’t a commodity and why it could go much higher. As it has.

The general rule in commodities is that fundamentals will ultimately decide the pricing structure of the supply and demand dynamic of the real marketplace. Well that ain’t CRUDE. I know it, and I even said it in the last article. Here is what crude is right now:

1. A currency proxy.
2. An alternate to gold ownership in lieu of inflation
3. A bet on a recovery in the U.S.
4. An interest rate hedge
5. A political salve for the economies of the gulf states and Russia

Remember what you can’t have. You cannot have the collapse of the oil producers internal economies and have any chance for political stability. This right now is probably most important in Russia. If you had not noticed it has been very quiet from “The Bear” for the last while as crude has remained above $50.00. The Europeans who hold most of the Russian Oligarch’s paper , on the grossly over extended loans that hang out there are all much happier when you and I help make those nasty cash calls by paying up for crude while blaming OPEC for tightening supply.

As the U.S. dollar has declined against all major currencies (primarily the “other” reserve currency, the Euro) the price of Crude has worked higher. Remember crude is produced in the local currency and sold in dollars. Therefore the price must reflect the exchange rate of the seller’s conversion from their own on shore currency to the lousy U.S. dollars that they receive for their product. With the primary reason for current dollar weakness being the need for the U.S. Treasury to sell some 35 billion dollars worth of junk, almost no, real return bonds, every week ‘till the end of the year, to finance the “current” projected deficit in the U.S.

Below are two charts that reflect crude and the dollar index I wish I could overlay them, but I hope you get the idea. They are in essence the inverse of each other. Especially since mid-April.

Chart 1

Chart 2

So what does this all mean? Well we talked about all this actually before. Crude is a function of its price sustainability based on its impact on the economies of user vs. suppliers . So at what price does crude trade up to? Well I thought that $50 would satisfy both needs. I was wrong based on the need for a much cheaper U.S. dollar to attract money to the bond market. I believe that the new range for this is probably $55-$70. Once again with a bias to the upside. Above $70 everyone in North America really starts to hurt again and the excess supply that we really do have has a chance of influencing the market again. The world broke, it shattered, the last time it got above these levels. It hurt a bit@ $80, it stung @ $100 and it completely fell apart @ $140. This is a much more fragile world this time around and no-one wants this seeming recovery to reverse back to where we were last October. If the market works as it has in the past it will at some point trade up to where it hurts.

There are very good ways to deal with this. Let me show you.

Update: Follow this link for the next article in this series “The need for fertilizer and Potash One“.

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