Could High Oil Prices Cause a Repeat of 2008?

In July 2008, WTI crude traded as high as $147.00 a barrel. This high price of crude at that time was straw that broke the camels back. Many traders and investors believe that the bankruptcy of Lehman Brothers was the catalyst for the 2008 stock market crash, however, the high energy prices really started that sharp decline in the economy. This morning, spot crude is trading at $101.69 a barrel while the major stock indexes are all declining lower.

Is crude trading higher because of high demand? The answer is no, crude is trading higher because many traders and investors believe that the European Union will begin to print Euro very soon. There is also a lot of chatter by some members of the Federal Reserve (U.S. central bank) that another round of quantitative easing or QE-3 will take place in the near term future. Anytime central banks inflate the money supply it will cause inflation in most commodities. We must then ask ourselves, why gold is lower this morning? The answer is likely because the stock markets are deflating and the Federal Reserve is not going to implement another round of quantitative easing until sometime in 2012 at the earliest. Gold is the ultimate indicator of inflation and deflation.

Plain and simple, the U.S. consumer cannot handle high energy prices. Every time since 2008, whenever oil trades over $100.00 a barrel the economy seems to slow down within the next couple of months. It is important for us to remember that the U.S. consumer accounts for roughly 70.0 percent of the gross domestic product (GDP) in the United States. If the U.S. consumer begins to curb spending it will be a serious blow to the U.S. economy. If all of this stimulus that has been injected into this economy is going to work for a while it will require the consumer to spend money.

This morning, the United States Gasoline Fund (NYSE:UGA) is trading higher by 0.38 cents to $47.69 a share. The UGA is certainly lagging the price of crude oil at this time, however, it will likely start to catch up to spot crude if oil prices remain high. The United States Heating Oil Fund (NYSE:UHN) is trading lower by 0.49 cents to $35.50 a share. Traders should know that the UHN was trading as low as $30.73 a share on October 4, 2011. Now that the winter season is upon us and high heating oil prices will simply be another tax on the U.S. consumer.

At this time the stock markets are holding up well considering the high energy prices, however, that simply cannot last too long. While we do not expect another repeat of 2008 just yet, any super spike in oil can send this economy into tail spin again. Remember, it was the high oil prices that caused the stock market decline first and then the collapse of Lehman Brothers followed.

About Nicholas Santiago 576 Articles

Affiliation: InTheMoneyStocks.com

Nicholas Santiago started trading in 1991. In 1997, he became a licensed Series 7 and 63 registered representative. He managed money for a large, affluent private client group. After applying his knowledge to his client base, he decided it was time to begin teaching those interested in learning his methods. He is an expert in Technical Analysis. He has become an accomplished technician in the studies of Elliot Wave, Gann Theory, Dow Theory and Cycle Theory. In 2007, he partnered with Gareth Soloway to form InTheMoneyStocks.Com and realize his dream of educating others about the truth of the markets.

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