Oil Price

A bump up in the weighted exchange value of the US$ has helped
nudge the oil price into a more normal seasonally weak interval.
AT $80 bl., the price was fabulously overbought. Then it was
trading at a 33% premium to its 40 wk. m/a, when a good rule of
thumb for traders is to be wary of any commodity that trades at
a 20% or more premium.

My view has been that autumn seasonal weakness could take oil
down to $65. Its decline so far has been so tortuously mild that
one is hard pressed to say with confidence that it could slide
another $8-10, especially since the bulk of the big overbought
has been relieved. But I would also note that the 12-26 wk MACD,
which does not whipsaw often, has turned down. Chart.

In my view, it is difficult for the US economy to expand at its
potential when the real price of oil is rising rapidly. Advances in
oil of this sort are short-term inflationary, push the Fed to tighten
credit and punish the real wage, as wages are far less elastic than
the price of oil currently. Unstable oil and petrol prices also
create uncertainty for businesses and households facing capital
investment decisions. Now, it is true that the oil demand to GDP
ratio has come down over the years, but that salient factor can
be outweighed over the shorter run by booms in the oil price.

Interestingly, my longer term log scale chart (weekly) has oil on
a fast track to $150 bl. by the end of 2010. That, or anything
within hailing distance of it, would be disastrous for the broader
economy. At present, basic supply / demand for oil hardly
warrants a $75. price. So I am expecting oil to break down from
the current upsweep and settle into a far more modest path, lest
chances for a continued path of economic recovery are imperiled.