Sweet, sweet crude is breaking out…
1. Breakout
The price of oil has broken out of its short-term consolidation pattern. Time will tell if we can hit a new high above $84, but the chart suggests we are going up. The Moving Average Convergence Divergence (MACD) has crossed over (albeit, a week signal above the center line).
2. Ecuador coup
There are a number of articles out today that suggest that a coup d’état in Ecuador has pushed up the price of oil. Ecuador is a member of OPEC. The country produces 470,000 bpd of crude a day and ships most of it to the United States.
3. China buying spree
In other bullish news for crude, the Chinese oil firm Sinopec is buying the Spanish oil company Repsol for $7.1 billion for a 40% stake in a Brazilian energy project. In other words, the Chinese commodity buying spree continues.
4. U.S. GDP growth
Others are pointing to the fact that revised figures from the U.S. Commerce Department showed a 1.7% GDP growth in the second quarter — up a point from the same estimate issued last month.
5. More jobs, more business
There have also been government reports this week that showed that business activity in the U.S. unexpectedly accelerated, and the ranks of the unemployed are thinning.
6. Stock market up
Furthermore, the S&P500 rose 8.8% in September — its best September in 70 years!
The stock market is a leading indicator. Obviously, investors are looking out six months and think things will be better, demand will be up, and the business cycle will return to expansion.
7. Supplies are falling
According to the Energy Department, supplies of crude oil fell 475,000 barrels to 357.9 million last week. Gasoline stockpiles tumbled 3.47 million barrels to 222.6 million. This was the biggest decline since Oct. 9, 2009.
On the flip side, demand picked up… Consumption of gasoline jumped 6.1 percent last week to 9.38 million barrels a day — the biggest one-week increase since Feb. 19.
8. The dollar is falling
The Flight to Risk
Over the past year, investors afraid of risk bought the dollar in a “flight to safety.”
They accepted almost zero percent interest rates on a fiat currency backed by tremendous debt and unfunded entitlements as far as the eye can see…
I’m not sure why investors see the dollar and U.S. Treasury bonds as a safe investment to flock to in times of international tribulation, but they do. Tradition, I guess.
But I digress. The point is as the world economy is percolating off the bottom, investors are seeking out greater returns.
Since mid-June, you see a “flight to risk.” UUP is an ETF that goes up at twice the rate for the U.S. dollar against a basket of currencies.
As the dollar falls, prices of things that are priced in dollars and yet have intrinsic value — such as oil, food, gold, copper — tend to go up in price.
And judging by the chart above, the dollar could fall a bit more before we get a bounce.
Buy gold, buy oil, buy uranium…
Sincerely,
Christian DeHaemer
Energy & Capital
