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$7.50 a Gallon Gas Here We Come?

Wednesday, May 21, 2008 | Teeka Tiwari

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Yesterday's near 200 point sell off had less to do with $130 oil and more to do with the Fed suddenly pulling the plug on interest rate cuts. Fed vice Chairman Donald Kohn splashed cold water yesterday on any hopes of continued rate cuts. He telegraphed quite clearly his belief that rates are fine where they are.

As the number two guy at the Fed, he’s no lightweight underling. Investors must reassess their expectations and, short of some new banking disruption, it’s a good bet that we see higher rates in the fourth quarter.

The blame game appears to be in full effect as congress looks to ferret out those evil n'er-do-wells that are jacking up food prices. It seems all those naughty speculators are to blame. CODSWALLOP! (That’s brit for baloney!) Sure the spec money guys are riding this wave, but there isn’t enough money on the planet to make a bear market go bull or a bull market go bear.

Long story short, after 20 years of declining and stagnant food prices, agricultural commodities are having their time in the sun. Burgeoning third world wealth is diversifying global tastes away from the bowl of rice that has served as sustenance to more than 70% of the planet's population. Matched with all of the corn that’s getting rounded up for ethanol usage, and it’s no wonder AG commodities are booming.

As I’ve said before, if you want to play this area, do so on weakness not on strength. Just like the tech bull market days of the nineties, the best way to buy was on the dips. The same is true for the commodity stocks.

Oil at $130 is C-R-A-Z-Y! What’s crazy about it is how fast the move has happened. I’ve long expected oil to trade as high as $150 a barrel, but that was over a period of years, or so I thought. Oil's move is nothing short of stunning. Especially considering the global slowdown in growth we are experiencing!!

I think we have a couple of factors at play here: 1) you have a TON of spec money bulling oil higher, but 2) demand is clearly and vastly outstripping supply. Do you really think that at $130 a barrel anyone in OPEC is actually holding back on their oil production??? Heck no, they can’t pump it out of the ground fast enough. Clearly the peak oil guys appear to be having the last laugh here.

I was on the Fox Business Network last week and one of the guests was railing against Goldman’s call of $142 oil. I remember when their call for $100 oil seemed ludicrous. How high can oil go? Seriously we have no way of knowing, $150, $180, $220, pick a number. I know if I had told you in 2002 (when oil was in the $30’s) that six years later oil would be $130 you would have called me crazy and never opened an email from me ever again.

In bull markets, prices go nuts.

Can gas get to $7.50 a gallon? That would be an unqualified yes.

Now, like all bull moves, we are going to see some sharp pullbacks. Remember when oil gunned to $80 then collapsed to $47 and change after Hurricane Katrina? Every one of those pull backs has just been a “reload” period for oil's push higher.

At $130 it would be natural to assume that we are overdue for a pull back. As an oil investor, that’s what you want to see ... a nice big scary pull back. It’s those pull backs that set the stage for the next leg of the bull move.

As a consumer, what you want to see happen is a vertical move up in oil to $200 a barrel with no pause.

Why?

Because it’s those vertical moves that are the stuff tops are made of. Just like when Gold topped in the 80’s after going straight up over a several day period. But I don’t think it’s going to happen that way. Nope, to this trader it looks like higher and higher oil prices are here to stay.

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“Let the Game Come to You.”

Teeka Tiwari
Chief Investment Officer
Point & Profit




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8 Comments

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  1. Martyn (1 year ago) Is this Spam?

    Quite some time ago Teeka wrote an article about the economic effect that China would have on it's neighbors. South Korea, Japan & Singapore were mentioned if I remember correctly. Banks & country specific ETF's were suggested as potential investments. Has anything changed since he wrote that piece?

  2. J.W. (1 year ago) Is this Spam?

    You are right about the ever climbing oil prices, the wild card is George Bush's gang trying the price protection game to keep America on the right track, on the flip side it is time for natural gas to make the next move.

    On the horizon is the new kids in town, the completion is almost near for the Hydrogen highway

    to allow vehicles to travel up and down the west coast, this will put the big push on for the Green cars/ trucks.

  3. John M (1 year ago) Is this Spam?

    Good Morning Teeka,

    What you say is peripherally true. However, if you knew the unseen hand as well as I do, here's what is really going on:

    1) Goldman Sachs goes belly up and FED inflates money supply to bail out one of their own.

    2) This action debased circulating currency and was extremely inflationary.

    3) Something had to be done to keep this excess currency off the street economy.

    4) Solution: Have mogul oil barons jack up the cost of oil by false "peak" intentional shortages. "Can't pump it out of the ground fast enough?" That's like telling Johnny, "Slower, slower!" Give me a break!

    When the soccer moms and carpooling dads have to buy groceries with less disposable income (for the time being) the lid remains on the pressure pan. That's the only reason the well connected (some say Bilderburgers) had the OPEC nations agree to jack up prices. This completely relieves FED policy and the policy of Congress and the Administration. Heck, rag heads are already "This week's enemy dejur"! Might as well vilify them more in the Joe & Jane Sixpack's world view since they are begging "Just Do Something!" It will not be long oil prices remain high. As soon as Joe & Jane demand cost of living raises, which were useful to absorb currency, will flood the street economy and here goes hyper inflation that will make the Volker years seem like raw rampaging prosperity. Global recession/depression? Give me a break! All that will happen is the dumb kids are going to keep smashing their chips because they get more. The currency as you and I know it today will be worth less than Pesos and Lira. It will require RFID chips or swipe cards to manage the flow of currency worth less than zinc pennies. RFID Radio Frequency Identification chips are where America is headed.

    Praise Allah after Mr. Broccoli OBAMA is elected president and Hillock Clinton joins him as his VP. But, you'll all be safer and you'll get used to being millionaires just as my great grandparents got used to being hundred-aires by the time they retired from a farm annual income of $190.00 a year in 1900; receiving their pension and SSI in 1949. Yup, they were just like Joe and Jane. They thought America was the most prosperous place on earth. Just imagine, they made more every month after 1933 than they earned yearly working their 80 acre farm by the sweat of their brow and the ache in their backs. So, don't worry, you'll get used to the term "millionaire". Everyone will. That's what rubber money gets one.

    5)Haunting problem: The difference between what is owed the Central Bank by the Treasury and what the IRS takes in is termed, deficit. That word derives from "deficiency". Ever wonder why Mexicans are welcome in America? They are new tribute slaves. Better than gold, these little buggers earn bux, buy tradeables, and best of all pay down the deficit so Congress can continue porkbarrel spending and remain electable; so presidents can remain BENIGN dictators enforcing democracy globally; and so important wastes of tribute like NASA and welfare continue in force. The logic behind backing currency with tribute slaves is they are regenerative. Like cattle, sheep, pigs, and crops, tribute slaves earn, spend, demand government services, and pay down the deficit. THE SAD TRUTH IS ONLY WAR AND DEATH CAN CONTROL THE HERDS AND CROPS AS THE HUMANITY HUSBANDMEN USE UNCONSTITUTIONAL TYRANNY AND MILITARY/POLICE FORCE TO MANAGE THEM. Like Camelot and Shangrila,and Neverland, America will go down in history as a never never place that never never was.



    John Mahler

  4. trader (1 year ago) Is this Spam?

    Great article Teeka. Looking at it another way, the value of USD is going down, the price of oil is not going up. If the price of oil and gold (real money) is compared, the price of oil is about the same. I think your article confirms that gold is going up.



    And what if Fed Vice Chair fears that USD will be the next carry trade currency - and that prompted his statement? Are 4th qtr higher rates still a good bet?

  5. paul b (1 year ago) Is this Spam?

    Teeka,

    I agree, overall high oil prices are here to stay, but for the last month or so global oil supply is exceeding demand (high prices reducing demand), so how can prices currently stay this high? Shouldn't prices fall back a little so supply/demand are equal?

    Since prices are continuing to hold and move up, isn't this a classic sign of a speculative bubble about to burst?

    Thanks for all your fantastic daily insights!

  6. John (1 year ago) Is this Spam?

    I believe the oil futures market is a true possibility doe to the demand for oil and ther weaker value of the US $

  7. Jim (1 year ago) Is this Spam?

    You forecast oil prices--what do you think gold top is? Also, I am committed for Wed 6 PM [pt] and wondered if you will tape this for later viewing?? Jim

  8. billie (1 year ago) Is this Spam?

    even if ethanol gets a real amount of production oil is still going higher and the ony thing that will help united states is opin the alaska grounds and drill. this article is right on target about pricing the topis where ever the public takes it to with no clear cut top showing i think we are headed onup to 200$ very easy
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