Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

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

© 2005-2019 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