Oil Approaches the Breaking Point

Oil has three cracking points: when it gets refined, when it stops rising, and when it breaks the economy. Econbrowser analyzed oil prices and the economy and concludes:

Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.

Merrill Lynch’s Sabine Schels, a commodity analyst, calculates that $120/bbl will break this recoveryless recovery. This price makes the energy sector 9% of the economy, and she says we saw that in the 1980s and in 2008. Since oil tends to rise into the summer, this puts the cracking point out in Q2.

Might oil peak before $120? Oil’s price is approaching a key level at $105/bbl (see chart, courtesy Market Oracle), the 61.8% retracement (this is the Brent Crude level; in the US WTI, oil fell a bit more on a cash basis, to $32, so the US level is just above $101/bbl.) You can see how it oscillated around the 38% level for a while before testing the 50% level at $90/bbl and falling back. It has now crushed through $90 and fallen off a bit, but stayed above $90. Watch to see if it falls back below in short order, indicating a false break. Otherwise we seem headed above $100 in short order.

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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