Best of the Week
Most Popular
1. Best Cash ISA Savings Account for Soaring UK Inflation - February 2018 - Nadeem_Walayat
2.Gold Price Forecast 2018 - February Update - Nadeem_Walayat
3.Bitcoin Crypto Currencies Crash 2018, Are We Near the Bottom? - Nadeem_Walayat
4.Trump Bubble Bursts, Stock Market Panic Dow 1175 Point Crash Analysis - Nadeem_Walayat
5.Gold Corrects, Bitcoin Markets Crash, Whilst Stocks Plunge - Nadeem_Walayat
6.US Treasury Bonds: Fuse to Light the Bonfire - Jim_Willie_CB
7.Dow Falls 666 Points As Cryptocurrencies Crash And Krugman Emerges From His Van - Jeff_Berwick
8.Stock Market Roller Coaster Crash Ride Down to Dow Forecast 23,000 - Nadeem_Walayat
9.Trading the Shadows - Oil, Dollar, Stocks, Gold Trend Analysis - B.R. Hollister
10.Stock Market Analysis: Baying for Blood - Abalgorithm
Last 7 days
How Inflation Reduces The Real Value Of Social Security Net Of Medicare Premiums - 19th Feb 18
Could Stellar Lumens be a Challenger to Bitcoin for International Payments? - 19th Feb 18
US-China Trade War Escalates As Further Measures Are Taken - 19th Feb 18
How To Trade Gold Stocks with Momentum - 19th Feb 18
Is a New Gold Bull Market on the Horizon? - 19th Feb 18
Stock Market Decision Point! - 19th Feb 18
An Inflation Indicator to Watch, Part 1 - 18th Feb 18
Get on Top Of Debt Before It Gets on Top of You - 18th Feb 18
Will the Stock Market Make a Double Bottom? - 18th Feb 18
5 Reasons Why Commodities Are the Investment Place to be in 2018 - 18th Feb 18
1 Week Later, Stock, Bond Market Risk Remains ‘On’ as 2 of 3 Amigos Ride On - 17th Feb 18
Crude Oil Prices: A Case of Dueling Narratives? - 17th Feb 18
Free 1000 Youtube Subscribers Services - YTpals, Subpals, SubmeNow Test - 17th Feb 18
How to Trade as We Near March Stock Market Top - 16th Feb 18
Bitcoin as Poison - 16th Feb 18
GDX Gold ETF Weathers Stock Market Selloff - 16th Feb 18
Casino Statistics and Demographics - 16th Feb 18
IS Today Thee Stock Market Turn Day? - 16th Feb 18
Huge SMIGGLE Shopping HAUL, Pencil Cases, Drinks Bottles, Back Packs, Toys.... - 16th Feb 18
Tesla Cash Keeps Burning at $320 a Share - 15th Feb 18
Big Conflict Ahead in the Financial Markets - 15th Feb 18
Stocks Extend Rally Off Friday's Low, But Short-Term Exhaustion Near - 15th Feb 18
Stock Market Out on a Limb... - 15th Feb 18
Things Only a True Friend Would Say About Gold - 14th Feb 18
Global Debt Crisis II Cometh - 14th Feb 18
Understanding Crude Oil Behavior - 14th Feb 18
Stock Market is Getting Scary... - 14th Feb 18
Stock Market - This Time is Different. Really?! - 13th Feb 18
Gold and Silver Long-term Buy, Short-term Sell Signal - 13th Feb 18
SPX Futures Are Sliding... - 13th Feb 18
Stock Market Topping Process Begins. The Bubble Finds its Pin - 13th Feb 18
Math Behind the Stock Market Crash and What’s Next – PART2 - 13th Feb 18
Gold Stocks Groundhog Week - 13th Feb 18
Platinum Looks Poised for Surprising Gains This Year - 12th Feb 18
Friday's S&P 500 Stock Market Bounce To Continue, But Selling May Resume - 12th Feb 18
The Inflation Trade and Bond Yields Rising Result in Equities Correction - 12th Feb 18
February 2018 Stock Market Crisis – What Next? - 12th Feb 18
How To Profit From The Bitcoin Bloodbath - 12th Feb 18
The Philippine Economic Dream Could Be Within the Reach  - 12th Feb 18
Is the Stock Market Correction Over? - 12th Feb 18
What Does the Stock Market Decline Mean for Gold - 12th Feb 18
Addicted to SMIGGLE Mega Review, Pencil Cases, Stationary, Back Packs, Drinking Bottles, Toys... - 12th Feb 18
Best Cash ISA Savings Account for Soaring UK Inflation - February 2018 - 11th Feb 18
The Fed’s Impossible Choice, In Three Charts - 11th Feb 18
US Stock Market, Gold, Silver and the Macro Backdrop - 11th Feb 18
After Two weeks of Stock Market Decline, People Are Ssking, “Are We There Yet?” - 11th Feb 18
How to Grow Tomatoes From Seeds, Homegrown Organic Money Saving Gardening - 11th Feb 18
Youtube KILLS ALL Small Channels with New DeMonetization Rules - 11th Feb 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

The Misunderstood Link Between Crude Oil, Natural Gas and Inflation

Commodities / Inflation Jun 29, 2013 - 06:58 PM GMT

By: Money_Morning

Commodities

Dr Kent Moors writes: According to conventional wisdom, there can't be a significant rise in inflation without a corresponding, and usually preceding, jump in energy prices.

In fact, the correlation between energy prices and inflation has become almost a mantra among some market pundits.

Unfortunately, the reality is somewhat different than what's portrayed by talking heads in thirty- second sound bites.


As with most complicated problems, the answer just isn't that simple.

While the energy sector stretches from hydrocarbons, through alternatives, to the renewed interest in solar, wind, geothermal and biofuels, it is the dominant force in the sector that tends to drive the markets.

That means crude oil and natural gas.

Oil, Natural Gas and Inflation
At first, the inflation argument seems plausible enough.

There would appear to be little opportunity for an across-the-board stimulation of the inflation fires without there also being a corresponding surge in energy prices. Energy is the single most pervasive underpinning of economic activity.

In fact, post-facto analysis of the 2008 run up in both natural gas and oil prices does provide some credence to the idea that rising energy costs did serve as a precursor to inflation.

However, there is a caveat. It's one frequently confronted in all types of analysis.

What appears to be a causal relationship (in this case concluding that rising oil and gas prices produced an increase in inflation) actually simply masks a deeper reason for both.

As it turns out, the deeper reason for the move was its relationship to interest and credit. This is critically important for individual investors.

Here's why.

Selecting oil and gas stocks is no longer a function of aggregate cost considerations in broader economic sectors. The presumption that a spike in oil prices will result in a spike in inflation is just not manifesting itself these days.

The shortcoming of relating energy to inflation is found in how that relationship is filtered by other considerations.

Put simply, energy prices in general - and oil and gas in particular - are no longer a direct driver of inflation.

Rather, the current oil/gas price component has been showing a resiliency in the absence of inflation.

It has also done so despite lower general market performance (NYMEX WTI, or West Texas Intermediate, benchmark crude futures are up 3.8% for the month through close yesterday; in contrast, the S&P is down 1.7%).

Oil Prices and the End of QE
This month, I have been discussing the relationship between oil prices and interest rates (Why the Fed's QE Is about to Move Oil Prices, June 14, 2013; Why "Deleveraging Markets" Will Drive Up Oil Prices, June 24, 2013).

Because what lies behind the current dynamic involves the combination of angst over Fed policy changes, an almost forty-year record collapse in gold prices, and the emergence of crude oil as a new store of market value (on which see my previous discussion in Why Oil is Becoming the New 'Gold Standard,May 20, 2013).

Now some of this will play out in a more protracted and longer-term inflationary concern. As bond prices continue to decline and interest rates rise, the normal trade off between the genuine costs of energy and the effective price to the general economy will play out differently this time around.

The change essentially comes from the expected departure of QE. Actually, this is a perception of market makers, especially those who have made too much use of cheap credit as the Fed kept interest rates low.

The reality is the end of QE is at least a year away, even if the economic recovery speeds up. Even then, there are clear indications that the Fed will continue selective buying of bonds as the need arises.

What ends is the "safety blanket bailout" - the guarantee that there will be $85 billion in bonds and related instruments purchased out of the market each month. Many economists believe this (expensive) set of federally-sponsored training wheels for the free market bicycle that is supposed to be peddled by supply and demand (not daddy) have served their purpose.

The disengaging of the Fed, however, will have an inflationary impact unless the bond pricing situation can be met. Yet that cannot happen with another round of issuing newly minted credit that does not result in tangible asset or value generation in the economy itself. Pumps can be primed from the outside, but the object remains a sustainable independent water flow.

The Fed is banking (in a more real sense that it might appear at first glance) on an accelerating economic recovery to provide value production. This is essential to offset the inflationary impact the central bank's own monetary policies created.

Parts of QE appear to have been necessary to avoid a catastrophic meltdown following the credit crunch. But such actions ultimately have a price and that usually emerges in an inflationary cycle.

This time around, oil prices are a restraining byproduct rather than a precipitating cause. Nat gas serves a similar function, although the expected expansion of demand from the exports of liquefied natural gas (LNG) and an increasing replacement for coal in electricity will be tempered by considerable surplus reserves available for lifting.

What Investors Need to Keep an Eye On
We still wait on how all of this plays out, but one element is already becoming clear.

As it assumes a more dominant position in expressing more extended market value, oil and gas are allowing the average investor greater leverage in working profit out of upcoming market gyrations. .

I will have more to say on this as the directions become more manifest, but this will not be a "rising tide lifts all boats" approach.

We need to watch the ratio of E&P (exploration and production) costs to wellhead revenues (what the oil and gas provide right out of the ground). The object will be to identify which companies are positioned to benefit as interest rates rise, inflationary concerns emerge and costs reflect both.

Early identification here will result in some nice profits as the new market environment develops.

Source :http://moneymorning.com/2013/06/29/the-misunderstood-link-between-oil-natural-gas-and-inflation/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules