It’s great that the worst has blown over after five years of the world “treading water” economically. Now unemployment levels are creeping lower in many parts of the world. Housing is recovering (so far) here in the United States, and banks are beginning to lend once again.
Oh it’s not “full steam ahead” by any means. Unemployment still trickles down and loan growth is increasing at a mild pace. But I’d rather have that scenario than what we’ve had for the last five long years.
Now, I don’t want to spoil the party, but there is one thing to keep an eye on. Because it will likely be the catalyst for the next downturn in stocks and the next onset of the next recession.
What is it? Rising oil and fuel costs.
You see, a couple of years ago, a barrel of oil here in the United States was at $70 and Brent crude was at $70 too. Where are they today? West Texas Intermediate (WTI) crude is trading around the $96 per barrel area and Brent crude is in the $116s.
That means WTI crude is up 37 percent from those lows and Brent crude is up a whopping 66 percent over that same time period. And Brent is what a lot of the world uses.
So where does that put gas prices on average right now? According to AAA, the national average on Feb. 4 for regular unleaded gasoline was $3.52 per gallon.
Both oil and gasoline prices are trending higher. So it won’t be terribly long until we’re up to the $4 per gallon mark again. And you remember how tough that gets on our economy.
It hits us hard at the consumer and commercial level.
For consumers, the more they have to spend to put gas into their tanks, the less they can spend on discretionary goods in retail outlets, etc. And since roughly 70 percent of the economy is based on consumer spending, you can see why the economy takes such a huge hit when oil’s price drives up the price of gas at the pump and consumers quit spending on “the extras” of life.
But rising fuel costs also cut deeply at the commercial level too. Besides the loss in retail spending that businesses experience during those times, they also incur their own higher fuel costs to get products shipped from warehouses to retail outlets.
They also have to transport upper level executives, traveling salesmen, etc. and that becomes a huge expense during those times. So the lack of retail spending and the added fuel costs to their own operations causes their earnings to shrink.
As their earnings taper off, a high stock price is not justified anymore. The stocks start to dive and reflect the lower rate of earnings out of companies.
So the question is, “When will all of this happen?” In fact, we were just discussing this very issue on CNBC on Feb. 7.
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The other guest on with me thought that the economy could handle $100 to $120 a barrel oil. Well, what has history shown us?
We know without a shadow of a doubt that the economy crashes out with $148 per barrel oil. We also know that we had a mini-crash at oil’s most recent peak around $115 per barrel.
So while it’s always hard to pinpoint what “dollar per barrel” level is the trigger point, we do know when we are getting to the danger zone. That’s for certain.
We know that as oil eventually trades above $110 per barrel that we’re in that danger zone. And that if oil begins to sustain levels of $115 or higher for any length of time, we’ve got to watch everything like a hawk for any sign of an economic downturn.
Now, here’s the deal. For the last two years, oil has been coiling up in a symmetrical triangle pattern on its chart. We’re about to complete the fourth and fifth passes within this triangle shortly.
Typically, once five passes have been completed, there is a huge breakout. With the way the movements have been acting within the triangle, it’s been taking about two months for it to tag each side of the triangle in the last couple of passes. That time frame tends to get shorter as the triangle narrows.
So I estimate that we’ll see a huge breakout in oil’s price within two to four months from now. So that will be here before we know it.
IF oil’s breakout is upward (which is likely), then I think it’s highly possible for oil to trade as high as $130 or $140 per barrel over the next nine to 12 months. If that happens, we’ll definitely see $4+ per gallon and we’ll be in the zone that will likely tip the economy southward once again.
How will we know if oil has broken the triangle to the upside? If oil’s price sustains a level above the $105 to $107 area, then the triangle has broken out to the upside and huge increases in price will soon follow at the pump.
The way to hedge yourself if this happens, is to own oil stocks. We own some of the finest oil stocks in the world in the Ultimate Wealth Report. So if you don’t know which ones to buy, consider joining us at www.ultimatewealthreport.com
and you can peer over my shoulder and see what I’m buying to see if it appeals to you as well.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
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