What Is the Message From Oil Prices?
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Highlights
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In recent weeks, the two most watched benchmarks for crude oil prices have decoupled. We believe the prices will re-converge.
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While a rise in U.S. oil prices back above $90 per barrel is not necessarily a negative for economic growth in the United States, a rise in gasoline prices has been shown to lift expectations of future inflation and would likely boost bond yields.
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We believe focusing on the theme of reflation is important to investment success in 2011. Portfolio exposure to commodities asset classes and effectively reducing bond duration are two ways to potentially profit and protect from the return of inflation.
Oil prices have generally been rising since the lows in the economy and markets of early 2009. But, in recent weeks, the two most watched benchmarks for crude oil have decoupled. The price for Brent crude oil has moved sharply higher to over $100 per barrel, while the price of West Texas Intermediate (WTI) crude oil has dropped back to around $85 [Chart 1]. This unprecedented decoupling of oil prices leaves many to ponder which benchmark will prove to be right and what it means for consumers, the economy and the markets.
WTI crude prices, used primarily in the United States, are falling due to:
- Inventories of crude oil are at record levels in the United States. Well above the five-year average and at the top end of the five-year range of inventories for this time of year [Chart 2].
- Demand growth has been modest. For example, a gauge of gasoline demand, miles traveled by vehicles in the United States, is rising only slowly on a year-over-year basis, according to the U.S. Department of Transportation [Chart 3].
- Supply has been strong with oil imports from Canada having been up along with higher U.S. oil production (despite the decline in Gulf of Mexico production).
The price of Brent crude, used primarily in Europe and Asia, is rising due to:
- High demand from Asian emerging markets.
- Declining production in the North Sea.
- The geopolitical risk of disruption of transportation through the Suez Canal.
We believe the prices will re-converge with Brent falling and WTI rising in price over the coming months. A rise in WTI back above $90 per barrel is not necessarily a negative for economic growth in the United States. Historically, the threshold where crude oil prices limit demand — and, therefore, economic growth — is above $110 [Chart 4].
However, an accompanying rise in gasoline prices has been shown to lift expectations of future inflation in consumer surveys – something we know the Fed watches closely in formulating monetary policy. In fact, the minutes to the January 26, 2011 Federal Reserve policymaking meeting (released last week) noted that “households’ long-term inflation expectations stayed in the range that has prevailed for some time.” An uptick in gasoline prices could boost these expectations and bias the Fed toward starting a series of rate hikes that may slow U.S. economic growth. Rate hikes are now fully priced in to the Fed funds futures market for as soon as November of 2011. But even before the Fed takes any action to tighten monetary policy, higher inflation expectations would likely boost bond yields and continue the rise in rates that drove the 10-year Treasury note up to about 3.75% in early February 2011 from 3.4% in January 2011.
We believe focusing on the theme of reflation is important to investment success in 2011. Portfolio exposure to commodities asset classes and effectively reducing bond duration, or interest rate sensitivity, are two ways to potentially profit and protect from the return of inflation.
Click below to download a copy of the full article
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Stock investing may involve risk including loss of principal.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tagged as:
Financial News,
Jeffrey Kleintop,
LPL Financial Research,
Weekly Market Commentary
LPL Financial Weekly Market Commentary for February 22, 2011
by Rose Greene, CFP on February 24, 2011
What Is the Message From Oil Prices?
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Oil prices have generally been rising since the lows in the economy and markets of early 2009. But, in recent weeks, the two most watched benchmarks for crude oil have decoupled. The price for Brent crude oil has moved sharply higher to over $100 per barrel, while the price of West Texas Intermediate (WTI) crude oil has dropped back to around $85 [Chart 1]. This unprecedented decoupling of oil prices leaves many to ponder which benchmark will prove to be right and what it means for consumers, the economy and the markets.
WTI crude prices, used primarily in the United States, are falling due to:
The price of Brent crude, used primarily in Europe and Asia, is rising due to:
We believe the prices will re-converge with Brent falling and WTI rising in price over the coming months. A rise in WTI back above $90 per barrel is not necessarily a negative for economic growth in the United States. Historically, the threshold where crude oil prices limit demand — and, therefore, economic growth — is above $110 [Chart 4].
However, an accompanying rise in gasoline prices has been shown to lift expectations of future inflation in consumer surveys – something we know the Fed watches closely in formulating monetary policy. In fact, the minutes to the January 26, 2011 Federal Reserve policymaking meeting (released last week) noted that “households’ long-term inflation expectations stayed in the range that has prevailed for some time.” An uptick in gasoline prices could boost these expectations and bias the Fed toward starting a series of rate hikes that may slow U.S. economic growth. Rate hikes are now fully priced in to the Fed funds futures market for as soon as November of 2011. But even before the Fed takes any action to tighten monetary policy, higher inflation expectations would likely boost bond yields and continue the rise in rates that drove the 10-year Treasury note up to about 3.75% in early February 2011 from 3.4% in January 2011.
We believe focusing on the theme of reflation is important to investment success in 2011. Portfolio exposure to commodities asset classes and effectively reducing bond duration, or interest rate sensitivity, are two ways to potentially profit and protect from the return of inflation.
Click below to download a copy of the full article
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Stock investing may involve risk including loss of principal.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tagged as: Financial News, Jeffrey Kleintop, LPL Financial Research, Weekly Market Commentary