Friday, December 10, 2010

Stealth Climb

With tax legislation on the horizon and unemployment concerns lingering, it seems the minds of Americans are preoccupied. In the past, crude oil would have been on everyone’s mind as it crosses above the $90 per barrel level. Now, it’s hardly mentioned in the main stream media and rightly so as the other issues deserve more attention. But it will be interesting to see just how far the price of oil has to move until the country starts to take notice again. When will this stealth rise be known?

In the first chart below is the price of oil. Since the market bottom in August it has climbed 21% to hit $90 per barrel. At that rate, we will hit $100 oil by February. The second chart is the price of a gallon of regular gasoline. That price has already broken the cyclical high, and stands above $3 per gallon. If we hit $100 per barrel on crude, we could easily see $3.35 per gallon at the pump. This would certainly hurt consumers’ pocketbooks; maybe even enough to have us take notice.

Additionally, other commodities have posted staggering gains this year. Cotton is up 80%, wheat is up 20%, and sugar is up 40% to name a few soft assets, while gold is up over 20%. This asset class has been the beneficiary of Quantitative Easing policies in Developed nations and strong growth in Emerging nations, and is starting to stoke inflationary fears. With the recent fiscal and monetary policies enacted by our leaders asset inflation is expected to continue. I guess it is good the tax extensions will pass (if not this year then next session of Congress) so we can pay for the commodity inflation. Although now is the time to take notice before this negative feedback continues.