While everyone is jumping on the crude oil bandwagon this week, readers of this blog shouldn’t be surprised. We have been bullish on the black gold since November 30, 2011.
In the article, “What is Up With Crude Oil”, I presented a simple model based solely on technical inputs. As I always like to combine fundamentals and technicals in my analysis, I was hoping to find a fundamental “story” that would explain the positive price action our model was picking up. Several were offered and mostly based upon geopolitical concerns, but I had offered the following on November 30, 2011: “The other credible factor as to why crude may be moving higher is a hedge against currency debasement and inflation. This morning’s coordinated central bank efforts should speak volumes to this scenario. The policy response to every crisis is to print more money. The sovereign crisis in Europe isn’t solved by this morning’s action nor is the political gridlock in Washington. But risk assets are back in vogue, and higher crude oil prices most likely will be seen.”
But our position in crude oil hasn’t been without concern, and in “What is Up With Crude Oil? Again“, I showed how we use our trading models to set stops and to determine when our observations are really a bust. Crude oil had been down 7% from the time I made the “call” on November 30, but the draw down to this trade was within the realm of draw downs of past trades from this model. A reason to worry? Yes. But no reason to pull the plug on this trade.
I mentioned on January 3, 2012 that our “Crude Oil Model Remains Positive” and I also gave an account of crude oil in our “Monthly Model Mania”, and I quote from February’s edition: “While geopolitical concerns provide a premium for crude oil, the story is turning into one of increasing liquidity and excess speculation. Crude oil is likely to be a hedge against inflation, and I have no doubt that it will continue to outpace equities if this “risk on”, liquidity induced rally should continue.”
Bingo! Since the start of the year crude oil is out pacing the SP500. And of course, the headlines are screaming at all the usual media outlets how the surge in crude oil may crush the nascent economic recovery. And of course, the usual boogie men are being trotted out by our economic stewards: Iran, oil companies, and those evil speculators. Nowhere do I see mentioned the $2 trillion of money that has been created over the past 6 months out of thin air. But this is all spin and all nonsense. Rising crude oil and rising prices at the pump will have an effect on consumers and the economy. It is there everyday right in front of you as drivers go pass their filling stations. People know gas prices like they know their sports scores.
In the end, our models have served us well this time. So far, so good. But of course, the trade isn’t over yet. I know there are a lot of other smart people out there who saw this coming as well, but why anybody should be surprised that crude oil is rising is beyond me.
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Category: crude oil