"$200 Oil." For Real?

On the surface, it would appear that global stagflation arguments are strengthening. On top of recent supply warnings from Russia, Saudi Arabia, Nigeria and others, the FT reports:

• Opec’s president warned on Monday that oil prices could hit $200 a barrel and there would be little the cartel could do to help.

  The comments made by Chakib Khelil, Algeria’s energy minister, came as oil prices hit a historic peak close to $120 a barrel, putting further pressure on global economies.

  His remarks suggest Algeria wants Opec to continue to resist calls by US and European leaders for the cartel to pump more oil to help ease prices. But Mr Khelil blamed record oil prices on the weak dollar and global political insecurity.

  He told El Moudjahid, Algeria’s government newspaper: “I don’t think that an increase in production would help lower prices, because there is a balance between supply and demand, and the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years.”

Economies are slowing almost everywhere around the world, yet energy commodity prices continue to rise due to limited production, political problems, the weak dollar, monetary growth in Developing Markets, the increasing role of oil as a "store of value" for investors, and an astonishing lack of new conservation initiatives.

The pressure of higher oil prices will continue to slow the global economy until economic demand softens enough to cause investors to temper their long-run forecasts for the price of oil (because it's the long-run forecasts that are driving oil prices now). We think this time is near, so we haven't gone overweight oil or any other economic-growth-sensitive asset classes such as equities, commodities generally, or real estate. When we have increased weightings, it has been mainly to gain a foothold in the solutions to high commodity prices, such as the tech-driven companies that are energy & agricultural efficiency plays.

Now the big question -- Does a "$200 oil" comment by an Opec president signal a "top" in the oil price trend? We think, "quite possibly." It's doubtful whether any leading Opec figure has suggested that a 67% rise in oil prices is possible. Often, big "stretch" projections such as these, as underlying demand is slowing, signal a bull-market top. And perhaps the Opec president is posturing for the Fed to stop cutting rates, which is fueling the price of oil to the detriment of oil buyers and fueling inflation (slashing purchasing power) in the many Mideast nations whose currencies are pegged to the dollar. The latter trend could undermine social stability in Mideast nations.

So, on the surface, the "$200 oil" comment appears to contradict our caution on commodities, in reality the lofty claim could support our caution.