Many analysts have been quick to shoot down the risks of rising oil, however, when we step back and look at the rapid rise in prices it puts things in the proper perspective. One can’t help but look at a long-term chart of Brent and West Texas Crude and notice the incredible similarities between today and 2008 as Brent goes parabolic and WTI is not far behind (remember it is Brent that we should be keying off of here). Let’s not forget that oil prices were at $30 just 2 years ago….Charles Schwab elaborates:
“Our initial impression is that the move in oil prices is likely overdone for several reasons. There appears to have been much panic-buying and speculation in the run-up. Already, the Saudi Arabian government has said that it can step in and fill the void left by the supply disruption in Libya, which accounts for only 2% of global oil output. ”
“This, of course, is contingent on unrest not spreading to Saudi Arabia. King Abdullah is a popular figure and a new $36 billion package of social benefits may keep unrest at bay. But, there remains the possibility of uprising by the Shiite Muslim minority, which constitutes 75% of the population in the eastern province, and which is also home to key oil fields.
In addition to the Saudi response, the International Energy Agency (IEA) said it stands ready to release emergency stockpiles if needed, and officials from the Obama administration have stated that the Strategic Petroleum Reserve can be tapped, as well.
The bigger fear is that the oil supply upheavals spread. Bahrain, Yemen and Algeria are small producers, each with less than 2% of global oil output. But Iran produces 4.6% of global supplies.”
Of course, this is the concern as March begins. Protests appear to be spreading throughout the Middle East and while contagion is no guarantee it is more than disconcerting that this is all occurring at a time when oil prices are seasonally strong, inflation in Asia is raging and the Fed gives speculators the impression that they are hard at work at the printing presses until the end of June – right when the summer driving season officially ends. The winds are certainly blowing at the back of oil prices and that will likely prove to be a continued headwind for equity markets….
Source: Schwab
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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