One bright spot in a struggling economy facing high oil prices

Posted By on April 17, 2011

While reading doom and gloom articles for the past several months, it’s good to see at least one article looking at things a least a little more positive. Although commonsense and the overwhelming amount of negative news points to more bad news when it comes to our wallets, an article in this weekend’s WSJ pointed to a graph that at least seems to suggest business (as it relates to the Dow Jones Industrial Average) is improving gradually as crude oil rises. As a comparison 2008 crude oil on the Nymex rose faster and further (at least at the moment) at at time when the overall economy was already shrinking and markets were falling. From 2009 as the official recession ended, markets have been improving and as expected demand for oil rising. To the point, at least at this moment both markets and oil (and unfortunately inflation) are moving in tandem … we can only hope the recent spike and expected $4-$5 gasoline prices don’t set a tepid recovery into a second recession.

But investors should think twice before they pile into oil-related investments, analysts say, citing a number of reasons energy prices could fall over the next few months. For one thing, higher prices could lead to lower energy demand, a phenomenon called “demand destruction.” Retail gasoline demand already has begun to slide as consumers blanch at prices at the pump.


At the same time, the U.S., China and other big energy consumers are sitting on overflowing oil supplies. And the recent interest-rate hike by the European Central Bank could curb both growth and energy demand.

Oil Bears

Just as energy prices have shot up on global turmoil, they could tumble if things calm, some analysts say. Indeed, some previous bulls, such as Goldman Sachs, have turned more bearish about oil in recent days.

“The recent jump in oil is speculative, rather than fundamental,” says Joseph Tanious, market strategist at J.P. Morgan Funds. “Oil prices [could] retreat if fears of contagion in the Mideast begin to subside.”

The best advice for investors: Avoid speculating on energy-related shares, focus on those that appear most attractive, such as select natural-gas and coal providers, and be wary of the impact of higher energy prices on the overall economy.

Posted via email from RichC’s posterous


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