By now we have all heard reports of security forces firing on demonstrating citizens in the Kingdom of Saudi Arabia ("KSA").
KSA is in a very precarious situation: They cannot survive $50 Oil internally and they will lose their international support and sponsorship should Oil rise to, say, $150 (pulling both numbers out from my hat). If Oil prices were to collapse again, as they did in 2008 - 2009, The House of Saud would be without the Oil revenue they rely on to placate the masses... it then follows that they will endeavor to avoid this outcome at all costs. Given that, isn't it quite possible that they could error on the side of overly constricting output? Could this error lead to $150 or even $200 oil for an extended period of time? Sure it could. Wouldn't that have profound political and economic outcomes here in the West and the U.S. in particular? YOU BET.
I could game this out in scenario after scenario... but I think you get the idea. KSA simply cannot allow another price collapse to unfold... and given the (to my mind) certainty of what would happen as a result, a price collapse does not seem to be in the best interests of the Oil importers, either - $100 is better than $300. TPTB in the KSA simply must be looking at what happened to oil prices following the the 2008 price spike and dirtying their underwear with visions of hangmen's nooses and executioner's axes dancing in their heads. ( My brother recently quiped that they "can go out like the English monarchy or the French monarchy". My sense is that that is not far from what they must be thinking about as I write this.)
This is not to say that the price of Oil could come in, and hard, if China's soft landing fails to materialize. Looking at cooper prices these last couple of weeks leaves me more than somewhat concerned about what is going on over there... far more so than their "surprise" trade deficit. Actually, the trade deficit and the copper price decline should be mutually exclusive events (to my mind).... we shall have to wait for more data... if the price decline for copper is the winning data point, one can't help but become completely freaked about the price of the overall commodity complex... even Oil.
The House of Saud has been sleeping under the Sword of Damocles for quite some time. It appears to me that the thread holding that sword aloft is coming undone.
This is truly a fascinating time to be a thinking person.
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I think the great commodity run is done. I know I have alluded and hinted it was there at year end... so sue me. A couple of months off does not make my analysis incorrect. You can stick a fork in it. Copper is leading the way - the correlation between copper and the precious metals is well over 90%. Inflation? NAFC - maybe you THINK you are seeing inflation in commodity prices... let me know when you see it in housing and labor prices or in bank lending... my bet is your vision will be a great deal worse and your hair quite a bit more grey (too late for me, there just ain't much black hair left) before you see ANY of those things... but if you do see it, by all means, point it out to me... cause I must be freaking blind.
Bonds and high dividend paying stocks are where its at in my humble opinion. I know that the guys over at The Daily Reckoning believe housing has bottomed and the precious metals are a long way from the top... I reject housing out of hand, and I will trust in copper more than anything else to lead me out of temptation regarding precious metals. ESPECIALLY if Oil goes up big (and smushes China's and Europe's economy in addition to ours) because of supply issues (which will only lead to demand destruction the likes of which will be absolutely do wonders for the prices of bonds from issuers able to fulfill their obligations).
Of course, there are flies in this ointment, too. Grain prices are ALL about the weather and growing conditions this year (I know some people blame food/grain prices on Bernake... but if that were the case the grain markets would be in contango - not backwardation) but if the crop is good... look for prices to go down like a rock in a pond... at least when compared to the front month prices - that's what backwardation looks like as a practical matter. The better risk/reward play (unless you can predict long term weather patterns) is elsewhere.