Mike Shedlock has just published an article examining the energy price- consumer price relationship, he predicts a price turnaround in the $62 – 65 a barrel price level, close to the 200 day moving average for crude price.

Tight Storage May Lead To Huge Oil Price Drop

Technically, crude prices are a bit extended, no doubt in conjunction with the belief the economy is recovery. A likely place for the rally to fail would be near the 200 Exponential Moving Average (EMA) in red. Moreover, there are a number of fundamental reasons for the rally in crude oil prices to falter soon.

Even though it is likely that the current price level is $10 higher than the level that causes economic disruption the fundamentals of Fed money chasing/blowing a commodities bubble is quite entrenched. The measurment of the ongoing bubble is open interest:

Posted by: Matthew Robinson (Reuters)

Open interest and trading volumes in commodity futures markets have shown some resilience at the start of 2009 despite the dramatic price slides triggered by the economic downturn.

In the fourth quarter of 2008, open interest in U.S. crude oil futures fell to levels not seen since mid-2006 as the global economic crisis hit fuel demand and sent prices tumbling, before rebounding.

With open interest currently at 2008 levels and plenty of Fed ‘liquidity’ sloshing around with noplace else to go, a price increase – even to levels approaching $100 / barrel – is not out of the question.

This is really the big story in the economy right now. The Fed (and to a lesser degree the Treasury) is acting not in the country’s – or even the government’s – best interest. For instance, the US military is the greatest single US user of petroleum. Since the Fed is not being helpful except to speculators blowing asset price bubbles, the public is doing the heavy price control lifting. The ongoing Pyrrhic struggle is between beleagered customers on one side and the Fed and the energy cartel on the other. Right now the advantage lies with the Fed which can print unlimited money and which interacts with finance – and the commodities markets – in ways the public cannot.

All of the foregoing carries potential longer- term damage to consumers’ economic health. There is no questioning whether business can affort to pay the high pricse or whether a price spike will sink the world’s economy overall. 

In the current energy and equities markets, it is the Fed not the public which is the customer that matters. Don’t fight the Fed!