Oil prices closed @ $77.86 a barrel today and the trend seems to be continuing upward. $78 is a resistance level that has held twice so far this year.
Right now the dollar/crude relationship is where the finance economy crosses paths with the real world. Stocks and other financials are rising, the physical economy is in terrible shape. It doesn’t earn much and the high price of oil is the problem.
Oil-rich countries have had their own ax to grind at the ongoing United Nations climate talks in Bangkok, where the focus is on finalizing an agreement to cut world carbon emissions, the head of the Saudi Arabian delegation said Thursday. “We are the economically vulnerable countries as a result of any agreement,” said Mohammad Al Sabban, head of the Saudi Arabian negotiating team attending the UN Framework Convention on Climate Change (UNFCCC) that wind up Friday. “You cannot come here and say the way to do it is reducing dependency on oil, because that means you will transfer the burden to developing countries, especially those that are highly dependent on the exportation of oil,” Al Sabban said.
The producers aim to get their cut regardless of the effects downstream. With all the liquidity in finance, an opportunity exists to shift crude production from the earning- constrained physical economy to instead become a financial asset. The crude market would accelerate back into last summer’s hyper- inflationary dynamic.
If the pattern repeats, crude prices will soar and the consequence will be another real- world crash, followed by a crude price crash. A close above $80 would be an indicator that this inflation scenario is about to play out again.
At the same time, the (real) world is less wealthy than it was last summer. But … that doesn’t matter. It’s the liquidity in finance looking to convert to cash; the oil market is as good a laundromat as any.