May 10, 2018

What is $70 Oil Price Trying to Tell Us

A year ago, I wrote about why commodities is in a sweet spot to invest in and at that point in time. Oil is hovering at around the $50 mark, and fast forward to 2018, oil has reached a new high at $70, having appreciated 40%. Even though oil has performed exceptionally well, its performance has been eclipsed by Bitcoin with a 500% yearly gain. For investors who are looking for a high risk investment and has a more practical use as compared to cryptocurrency, oil may be your answer.

The purpose of this article is however, is to take a deeper look between the relationship of oil and the health of the global economy. Oil price is seen as one of the leading indicator of global economy, as a falling oil price is seen as a fall in economic activity as it is an essential resource for global shipping and transportation. The 2015 commodity crash is caused by a combination of a slow-down in China and overproduction of oil due to the entry of US shale oil. Although the oil crash did not predict a global recession, it did reflect the slow-down in the emerging market economies and the stock market crash in China. Oil price hitting $70 is a strong signal that the global economy is humming along in step again and should be positive for global equities in the next year or two.

With Great Oil Comes Great Risk

Oil, being one of the basic necessity of life, will see its rising price feed into the inflation story. An increased rate of inflation will spur the acceleration of an increasing interest rate, leading to a much needed recession to squeeze out all the fats incurred by governments, corporations and individuals that have leveraged too much on the low interest rate. The "deflation export" effect which many economists touted as one of the reasons keeping global inflation rate low is slowly losing its effect as wages in China rise and goods become more expensive.

Watch the price of oil as a too quick acceleration of oil prices will herald towards a faster maturity and end of this bull market. This bull is getting quite old anyway and getting quite fat around the edges!

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