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Will the Oil Price Stop Hiking Up?
Author: Mike Wright  | Posted: 28-05-2008 | Comments: 0 | Views: 58 | Rating: (57)  (?) 
According to Michael Cartine of Thomson/ Reuters “The danger from inflation comes in from its inherent volatility; when prices rise 3% the first year, 5% the next, 10% after that, but then stagnate or even drop for a year before trending higher again. This type of environment becomes increasingly difficult to make economic decisions in. Market participants around the world will certainly attest that the last year or so has been a particularly volatile time.”
The FTSE sold off hard, falling further than most other global stock indices on the week. UK top tier stocks, led by banks and real estate shares, fell on fears of negative equity in the UK housing market leading to trouble for banks and consumers. Retailers including Marks and Spencer were being punished as UK shoppers face the prospect of not being able to bank on further house price rises to fuel further spending. The bricks and mortar ATM is no longer paying out.
The plight of UK equities was not helped by that fact that even with oil hitting $135; UK oil stocks were strangely subdued towards the end of the week. Oil & gas stocks make up nearly 20% of the FTSE by market capitalisation. The question remains whether this relative weakness is the start of a rotation out of this sector, or whether it is just a couple of days profit taking. Markets gave us a significant ‘tell’ on Thursday as equities spiked following a natural gas inventory report which indicated increased levels of storage. Oil fell back and stocks surged in the opposite direction. Unfortunately, the rally didn’t last as crude reaches back to previous highs. However, the way that markets reacted was certainly telling and could be an indication of how things will play out when oil finally stops going up.
Crude oil has now accelerated by 30% in under two months and 80% in a year. It is little wonder that the MPC voted 8-1 to keep rates on hold with inflation running so high. However, there are some potential weaknesses in crude which are worth pointing out. According to Mike Rothman of ISI, global demand growth for oil is now well below last year’s increase. In addition there are reports of the Gulf being crammed with oil tankers chartered by oil producing nations to hold oil they cannot sell. This suggests there are no buyers at this price and when this happens, the laws of supply and demand come into effect. Goldman’s Analyst Arjun N. Murti recently predicted that oil could hit $150-$200 in the few years. While this prediction may still come through, there are increasing signs of this oil bubble over stretching.
With bank holidays in both the UK and US, it is a quiet start to next week on Monday. The most notable release on Tuesday is the US new home sales data which is expected to show indicated further pain for US home builders. The only question is the degree of acceleration in this decline, as is expected to be the case with the UK’s Nationwide House Price index released some time on Wednesday morning. The week’s top announcement though is likely to be the US GDP figures on Thursday as the US economy weighs up the benefits of the Bush tax rebate against the rising cost of oil.
After experiencing a much needed sell off, there is the potential for the FTSE to stabilise over the next week said BetOnMarkets.com traders, especially if (big if) oil manages to go a week without making a new record high. With that in mind a bull bet on the FTSE to be higher than 5900 on the 9th of June could yield around 19%.
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