Just how will triple-digit crude oil prices come to impact the demand for Gold...?

AFTER RISING to $139 per barrel in early June the oil price looked like it was 'spiking' to over $150, writes Julian Philips of the GoldForecaster.com...

   But can crude oil get that far, as forecast by both Iran's delegate to Opec and Morgan Stanley? It's already achieved a rise of 44% this year. And a great deal more than technical chart analysis will be needed to understand where oil, food, Gold and silver are headed in this environment.

   If this is the time when consumer and investor demand will rise beyond the crude oil supply's ability to provide enough, then this is not a 'spike' but a structural change in the market. It will produce a systemic crisis that has to be resolved in collaboration by the world's governments.

   Unless they prove capable of such cooperation, the prospect of $200 oil then comes into view.

Crude Oil & Gold: Banning Speculation

   Imagine national action is indeed taken against "speculators" by the regulatory authorities, hoping to prevent them from driving oil prices higher, then demand will drop for a while and the present price will be seen as a "spike".

   But we'd be very surprised oil goes below three figures. For while the exit of hedge- and wealth-fund investors would release oil to the market (meaning the balance between demand and supply on Comex contracts), in a relatively short time demand from the emerging nations will take up that new slack as well.

   With the inventiveness of US investors, they will surely find a way to protect their assets against inflation – possibly by taking them abroad and then investing in the same markets of oil and food, unless they are somehow prevented by Exchange Controls. They need to do this thoroughly, and not just superficially; amateur attempts to side-step the looming controls will be outlawed quickly.

   Whichever way it pans out, the collateral damage of such action to the monetary system will still be large and diverse, running from recession to currency crises. If the controls wait "until the Fall", as was put forward by some observers to the Senate hearings, it may well prove to be too late, and the global economy would require far more than just remedial regulation.

   The sheer volume of liquid funds globally will react to oil prices between $150 and $200, to any regulations reaching global investors, and to the weakening of currencies paying more than twice they were at the beginning of last year for their imported oil. Such pressures are more than global, financial stability can bear!

Where is the Oil Market Now? Supply

   Some analysts tell us there is a cushion of three million barrels a day globally, but there is little doubt that within a couple of years this cushion will be absorbed by the emerging world's demand.

   Remember also that a large amount of this spare oil is difficult to refine and so unpopular to consumers. That is why the oil market reacts strongly to threats against Iran – who have said they will suspend their two million barrels a day production if they are attacked – or a strike by Chevron's workers that could postpone a new supply of 250,000 barrels a day from the Agbami oilfield in Nigeria.

   How about Norway's suspension of crude output at three platforms in the North Sea, cutting supply by 138,000 barrels a day, or the news that Opec oil shipments fell by one million barrels per day in the four weeks to 4th May 4, confirming suspicions that the market has been chronically short of supply...?

Crude Oil Market Demand

   Full-year, global oil demand is now expected to average 86.95 million barrels per day, against previous expectations of 86.97 million barrels, as higher prices bite hard.

   Demand for Opec crude is seen at 31.8 million barrels a day in 2008, down from 32.0 million barrels last year. Non-OECD countries (chiefly China, the Middle East, India and Latin America) are expected to account for almost all of this year's growth in oil consumption.

   The dramatic rally in oil prices is due to rising demand in China and other developing economies as well as an influx of cash from investors seeking a hedge against the weaker dollar and inflation. The demand from emerging nations will rise to absorb all available supplies in the near future, but the demand from investors has clearly brought that day forward to now. These speculators, however, are not confined to investment managers.

   If you were a big consumer of oil, what would you do now? Airlines can't afford to run out of Avgas, so they would buy forward contracts to protect the flow. Now add to that miners and other industrial users. They would buy ahead of their needs not as speculation, but to get cheaper insurance against rising prices and ensure supplies.

   This way, demand is brought forward to a time when the supply is available and before it is cornered by the emerging world – which is also looking to buy forward supplies for the same reasons.

   This is not speculation or investment buying, in short, but a result of the certainty that supplies will run low in the intermediate future.

   Now what about normal consumption demand? The United States is entering the famous summer "driving season", that time when petrol demand is at it's highest. Do your homework as a pension fund manager, and you'll see the collateral damage to currencies (and not just Dollar) as well as global growth caused by high energy costs. You see that commodities, including oil and food, are an excellent alternative to stocks and currencies.

   Naturally, you want to protect your pensioners by taking positions in these essential goods. Yet eminent reporters have largely discounted the role of right-thinking pension trusts.

   All commodity exchanges hold sufficient stock to make delivery to those buyers who cannot be supplied by sellers on their books. If the buyers predominate, an exchange will not simply hope they close their positions before taking delivery. The exchange officials have to assume that delivery will come due, and so hold that amount in stock. They calculate this on a daily basis, and therefore rolled positions – running from one contracts period to the next – continue to affect these stock levels.

   If the exchanges were caught unable to deliver what had been bought, what then?

Crude Oil Market: Why Investors Affect Prices

   We have not seen any significant affect on the Gold Price from the oil market since the price of crude passed through $90 and gold started to descend from $1,035.

   Will oil start pulling on Gold from now on? Many analysts feel the oil price is in a bubble, so the same that happened to the housing market could happen to oil. They believe that's why gold hasn't reacted more directly.

   Wouldn't it be nice if the oil "bubble" burst, in other words. But wouldn't that be unrealistic given the above supply-demand information?

   More to the point, the oil price is now holding at triple-digit levels for a protracted period. If it persists further at this level – or even higher – the concept of oil being in a bubble evaporates and it becomes a structural cost adjustment in our lives.

   Once this happens, the Gold Market will then readjust accordingly.

In the final section of this article, for subscribers only, we conclude with what is likely to happen to the silver and Gold Price from hereon. Please visit the "GoldForecaster.com" for details...