Tuesday, April 13, 2010

The Trouble With Crude

Forget the 1929 - 2008 crash scenario – right now the last thing we need is another 1973 style energy price shock. The real technical problem is the price of crude pushing above $80. This appears to be the “tipping point” at which the fragile U.S. recovery cannot afford.

When we look at a long term monthly chart of the Dow Industrials plotted above the price of crude we can see the pre 2002 “Old Economy” comfort zone of under the $42 level. Also note the post 2003 modern trading range of crude – between the $42 floor and the $80 upper level. The North American markets can tolerate the higher floor because of peaking crude consumption due to alternate sources and more fuel efficient autos combined with muted long term growth prospects. The last time crude ran above $80 was in October 2007 – the same week the Dow Industrials peaked at over 14000.

Traditionally gold and crude have traded together with some lead and lag but now gold is the preferred sector – see chart below where we can see the traditional Crude / Gold relationship during the 2002 to 2008 period when the price of crude led the price of gold. Now gold is the better relative performer from mid 2008 to date.

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