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April 28, 2006

Oil, Death and the Dollar
by Clif Droke

In the previous commentary entitled "A new age of perpetually high oil/gas prices?" we examined some of the factors behind the fuel price spike and how it is being carefully managed by the oil oligopoly. In this installment we'll look at how violence in the Middle East and elsewhere is contributing to the rising oil price trend and also the connection between oil and the U.S. dollar.

A gentleman responding to my previous commentary made this very thoughtful observation: "It seems to me that higher oil prices are offsetting reduced Asian support for the US bond market. Windfall profits of the OPEC, especially Mid-East producers, are turning up as Treasury purchases via U.K. and offshore intermediaries (to avoid potential asset seizure in the event of hostilities, I presume). Thus, a tax (higher oil prices) on U.S. consumers gets recycled back into the bond market, which in turn supports the dollar. A corollary effect is that higher prices force more spending of Asian dollar reserves, which would also feed into this petro-dollar recycling scheme."

The above comments are definitely worth investigating and I think we'll find an answer to them as the year progresses. We'll all be able to observe the dollar/oil/bond connection and get some sense of where the links are further down the road. Food for thought to be sure.

Apparently there is still quite a bit of resistance out there to the idea of the oil oligopoly managing petroleum output and thereby controlling the price trend. Is it so hard to believe that oil companies have conspired to create artificial shortages for the purpose of driving up prices at the pump? An anonymous observer made waves back in late 2004 when he published photographs he had taken out in California of a gasoline tanker truck unloading its contents into the desert sands. The concerned citizen promptly sent copies of the photos to the oil company from whose truck the gas was being purposely dumped. He later received this response: "You didn't see what you thought you saw...what you thought you saw was something you didn't actually see."

A Shell refinery in Bakersfield, Calif., made headlines in back in '04 when it closing down despite having the biggest refiner margins of any Shell refinery in the nation and despite a dire need for more gasoline supplies in the state. "Only an oil company that wants to short the market and artificially drive up the price of gasoline would demolish a highly profitable refinery rather than sell it," said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in response to the move at that time. Truly, the motives of the erstwhile "seven sisters" (which have now been further consolidated through industry intermarriage) can be clearly seen through actions such as these.

In reference to the above headline, there is of course a connection between the price of oil and violence in the Middle East. The violence is both a consequence of the oil and a contributor to the higher oil price. As one commentator asked rhetorically, "Would the U.S. be in the Middle East if there wasn't oil there?" Indeed, U.S. military occupation of Iraq and, before long, Iran, is primarily an economic motivation as are most things in this world.

The connection between the oil price trend and the trend toward death and violence in the Middle East is stronger than you might think. In a previous commentary I showed you the correlation between the gold price and the Global Bombing Index (GBI), which in turn reflects the worldwide trend toward bombings on a daily basis. The increase in bombings, mainly in the Middle East region, has been one of the most frightening and relentless trends of 2006. To better show the rate of change in this non-stop upward trend I've constructed a series of short-term rate of change (momentum) oscillators which show the peaks and troughs along the bombing cycle for the year to date.

There has been an observable correlation between the troughs in the global bombing cycle and subsequent upward trends in the bombings and the oil price. Since the beginning of this year, whenever bombing momentum has bottomed and then turned up sharply higher it has triggered an oil price rally. The higher the move in the global bombing momentum, the higher the oil price has rallied (or at least remained near recent highs). You can see the extreme spike in the latest global bombing momentum in the update chart below. Not surprisingly, oil made a recent high near $75/barrel.

The recent spike in 20-day bombing momentum as reflected in the above chart is reminiscent of a temporary peak of the short-term trend. At least that's how it would be interpreted in a classical momentum oscillator. Admittedly, GBI and its momentum derivatives are still quite young and relatively untested, especially considering that it's not measuring price at all but rather militant/political activity on a global scale. Nonetheless, my hope is that this huge spike in 20-day bombing momentum represents at least a temporary peak in the recent bombing trend, which up until now has been head-spinning.

It would do us well to pause and reflect on the human aspect behind this soulless indicator. While the global power brokers may look upon bombings as an opportunity to raise prices ("Buy when there's blood in the street" is the old Robber-Barron's refrain) this relentless rising trend underscores the enormous loss of human life in just the past four months, especially in the Middle East. The number of bombings as reported by the BBC since the year began has now exceeded 150 on a global scale. The death toll based on the reports in the BBC since January number at least 1,203. This doesn't include the number of victims injured by the bombings.

Think about that for a minute. One thousand, two hundred and three deaths in only four months from bombings alone! That doesn't even count the deaths from gunfire and other war-related activities. At the current rate, if this pace is maintained over the rest of the year it would bring the bomb-related death toll to approximately 3,600. Can you imagine if this bombing trend persists for another 2-3 years (much like the oil price trend has)? Or longer? Or if war escalated into Iran and other Mid-East regions? These statistics would argue that it's high time for U.S. officials to reconsider their country's military presence in the Middle East.

On a (hopefully) more positive note, it has been observable in recent days that a rash of news headlines have focused on the ire and outrage many Americans are feeling right now over the exorbitant fuel prices. One such headline that crossed the news wire today read, "Voters Sour on Gas Prices: Pump pain fueling Congress, Bush woes." This being an election year will no doubt bring the oil/gas situation into sharper focus. In the past two years whenever the oil/gas price trend starts making the headlines, especially when involving consumer outrage, a temporary respite (emphasis on temporary) for consumers is usually near. Let's hope that this time will be no different.

Clif Droke
ClifDroke.com

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving internal momentum and moving average systems, as well as securities lending trends. He is also the author of numerous books, including "How to Read Chart Patterns for Greater Profits." For more information visit www.clifdroke.com.

Copyright © 2003-2008 Clif Droke

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