Thursday, June 26, 2014

Oil & Commodity Prices (excerpt)

The clear and present threat to the bull market is the current geopolitical crisis in the Middle East, specifically in Iraq. ISIS militants continue to extend their advance in the country. On Tuesday, Iraqi security forces fought fierce battles with the al Qaeda-linked group as both sides attempted to gain control of the country's largest oil refinery, which produces 300,000 bpd. The price of a barrel of Brent crude oil has risen from this year’s low of $104 to $114 on Wednesday.

Yesterday, I highlighted one of our charts, which shows the price of a barrel of Brent crude oil versus the CRB raw industrials spot price index. I observed: “When both indicators are rising together, that tends to signal that the global economy is growing. When they are both falling, the global economy is weakening. The ideal scenario is when oil prices are falling while the CRB is rising. A red flag goes up when rapidly rising oil prices depress industrial commodity prices, as may be happening now.” The CRB index is down 2.3% from its recent peak on May 12.

I average the two series to derive our YRI Global Growth Barometer. It isn’t sending a distress signal yet as the price of oil has increased more than the CRB index has dropped. In the past, it correctly signaled the global downturns and slowdowns during 2008, mid-2010, 2011, and early 2012. It has been relatively flat since then at a high level, confirming that the global economy is growing though at a lackluster pace.

Today's Morning Briefing: Early Warning Indicators. (1) There’s always something to worry about. (2) Clear and present danger is currently in Iraq. (3) Watching oil prices and commodity prices for hints of more trouble. (4) No distress signal yet. (5) A good sign: S&P 500 Energy stocks outperforming. (6) S&P 500 remains resilient, along with Transportation stocks. (7) Global oil demand at another record high, but growth is slow. (8) Crude oil demand falling in Europe and Japan, flattening in China, rising in India and Latin America, (9) Non-OPEC output at record high led by North American producers. (10) Can we manage without Iraq? (More for subscribers.)

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