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The Energy Report

2066f3d3-9151-4816-8492-c2304bb09a03

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The turning point and the new commodity bubble

Mon, Apr 6 2009, 06:10 GMT
by Phil Flynn

Alaron

Is oil at a turning point? Get ready bubble buyers as the next big oil bubble is getting inflated once again. There is 1.1 trillion dollars of global economic stimulus and a global interest rate imbalance between the United States and Europe and this is creating the same type of macroeconomic conditions that caused oil to spike up to $147.00 early in this economic crisis. Forget about supply and demand for the moment because they are just a passing afterthoughts. The commodity markets seek to adjust to what the UK Prime Minister calls a ‘New World Order”. A new world order that favors Europe as the money that the G20 pumped into the IMF and the World Bank. And this is money the EU is not going to have to spend to stabilize weaker developing EU Nations.

Obama says this G20 accord will be a “turning point” in our pursuit of global economic recovery but perhaps the real turning point for oil was when the Federal Reserve made the historic decision to move to quantitative easing and the EU has not. Oil has been soaring ever since that fateful day and now it is getting more bullish as the G20 moves ECB policy, making the Euro the go to currency once again. The ECB, in a consensus decision, cut its benchmark rate to 1.25 percent from 1.5 percent as opposed to the half point the market was looking for. The move was very inflationary for oil as it appeared that the conservative move means by default the EU is in better shape than the US. Dollars flowed out of gold and bonds and gravitated to the stock markets and the Euros. The relative difference between where the US is on rates versus Europe will cause many dollar based global commodities to soar. Oh sure they pledged to announce new, unconventional policies to try to revive bank lending and activity in May but in the here and now, May is far, far away. And now that Europe only cut their rate by a quarter it seems the Euro is now the dominate currency once again.

We saw an immediate reaction as traders sold the dollar and bonds and ran to the Euro and commodities like oil. Oh sure you could argue that the better than expected manufacturing data against a backdrop of OPEC production cuts and falling domestic production as the impetus for the rally and you might be partly right. You could say that the stimulus effect of this global economic intervention will create a surge in energy demand creating a scenario where we could go from a massive over supply to an under supply in a minute but the truth is, more than anything, we are seeing the inflationary effects of the G20 action. We are seeing the inflationary effect of the Fed's quantitative easing. Gold fell as the Euro was a safe place to be and with global stock markets soared. Its oil bubble 2 coming to a screen near you as oil will focus more on the dollar-euro relationship and the surging stock market as opposed to weak demand and oversupply.

The truth is that the incredible rise that we see in oil is another bubble on its way to being popped. Now don’t get me wrong, it may be some time before the inflation of this bubble gets to the point of bursting but it will burst. In the mean time trading will be explosive and more fun than ever! Get in on it! Also get your news on the Fox Business Network where you can see me every day! And make sure you open your account by calling me at 800-935-6487 or email me at pflynn@alaron.com.

Buy May crude at 4750 - stop 4890.

Buy May heating oil at 13000 - stop 12400.

Buy May RBOB at 12000 - stop 11700.

Buy May natural gas at 320 - stop 290.

Published on  Mon, Apr 6 2009, 06:12 GMT