Why Did Crude Oil Spike So High?

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July 2008 Light Crude broke through resistance at $130. Narrow consolidation above the new support level would warn of another sharp rally. Reversal below $130 would be healthier, testing support at $125 and establishing a more solid base for the up-trend. A word of caution: rising trendlines show an accelerating up-trend, or self-reinforcing cycle, which is likely to culminate in a sharp upward spike followed by an equally sharp drop as the market corrects from its excesses.

...There has been much debate in the last week over causes of the recent spike in oil prices.

- Oil tanker leasing rates have apparently trebled since April as Iran and Venezuela stockpile crude oil, restricting supply in anticipation of even higher prices in the months ahead (World-check).

- Low interest rates from the Fed have reduced the carrying cost of stockpiling various commodities.

- Expectation of rising inflation has also fuelled demand for investment in real assets. With the housing market in a state of collapse and equities facing a recession, commodities remain one of the few viable options.

- The growth in commodity index funds from $13 billion to $260 billion over the last 5 years shows a close correlation to rising commodity prices, according to Michael Masters in testimony before the Congressional Subcommittee on Homeland Security and Governmental Affairs. Masters, a hedge fund manager, appealed to Congress to end the practice of index speculation.

The only obvious answer appears to be to slow the economy, thereby reducing demand and inflationary pressures. The Fed cannot raise interest rates, however, without exacerbating the housing crisis and further damaging the already vulnerable banking system. So $150/barrel or $200/barrel oil may be the least painful way of achieving this.

July 2008 Light Crude broke through resistance at $130. Narrow consolidation above the new support level would warn of another sharp rally. Reversal below $130 would be healthier, testing support at $125 and establishing a more solid base for the up-trend. A word of caution: rising trendlines show an accelerating up-trend, or self-reinforcing cycle, which is likely to culminate in a sharp upward spike followed by an equally sharp drop as the market corrects from its excesses.

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