Oil. Commonly referred to as 'black gold.' In one way or another, everyone on the planet uses it. Recently, every newspaper, financial magazine, National TV news, Congressional press conference, and geopolitical commentary mentions oil and its rapidly rising price.

During the pandemic, when the world was locked down, oil use was low. At one point in 2020, the price of oil went negative. That means the oil storage units in the US were full and could not take on additional supply. Therefore, the price plummeted, and we saw gasoline at the pump as low as $2 a gallon. It's quite a different story today.

Then the economy opened back up and oil prices quickly rebounded. However, there are several other reasons that oil prices have continued to go up. During 2021, the price of oil went up by 60% and hovered around $80-85 a barrel.

Then Putin’s invasion of Ukraine began in late February 2022, and Russia (the third largest oil producer in the world) was sanctioned and countries normally relying on Russia’s oil wanted to stop taking it. Russia exports over 5,000 barrels a day out of its country. This has only exacerbated the existing tight supply and higher prices for oil around the globe.

Most Americans feel the direct pain in rising oil prices at the gas pump. Gasoline prices are up over 50% from early 2021. However, we still have among the lowest priced gasoline in the world.

Most of the gasoline in Europe (bought in liters) is above the price of our gasoline, topping out at the gallon equivalency of $8-$10. In Russia, gasoline is approximately 50 cents a litre, making a gallon approximately $1.75. In Italy, gasoline is $2.50 a litre, making it approximately $9 a gallon. Remember that the next time you are at the pump and you complain about the high prices of gasoline.

The US is self-sufficient for most of the oil we use, with a daily deficit of a few million barrels a day which we import from places like Russia and Saudi Arabia. We had been more self-sufficient, but this administration has made it more difficult to produce oil (curtailing federal drilling leases), and we are finding it ever more necessary to bring it in from other countries.

Oil’s Impact on Inflation

In early March, the release of the monthly CPI (Consumer Price Index) indicted that inflation went up at a yearly rate of 7.9%. We have been writing about this in our last few week Market Outlooks. This was the highest rate in 40 years. Like many economists, we think it is up much more than that. Yet, energy is only a 7% factor in the price of the CPI, with 4% for fuel and 3% for home energy prices.

The CPI was already close to double digits during the latter months of 2021. The government continues to blame higher energy and food costs on the Russian invasion of Ukraine. However, prices for just about everything were increasing at an accelerated pace long before Russia stepped into Ukraine.

Here are a few more reasons for the rise in oil these past 18 months:

1. As more and more people became vaccinated, there has been a revival of economic activity. People are driving more and are venturing back into traveling. Business is close to back to normal and the demand for oil has shot up.
2. More people have elected to drive as opposed to taking public transportation. Some of this is due to the habits of isolation that occurred during the pandemic and the need to not be in crowded areas.
3. Oil has become a more desirable way to create power worldwide. Shortages of coal have created higher consumption of oil to help power the global community.
4. In some places in the world, oil has become cheaper to use for power generation than natural gas.
5. There are many more cars in the world. India and China now boast an estimated 300 million cars in each of their countries. China had only 60 million cars just ten years ago.
6. The global supply chain is putting additional pressure on trucking and cargo ships, which are huge consumers of oil.

You may be surprised to know some of the main uses of oil other than for gasoline for your car. There are over 6,000 products that are made from oil. Many more than you might expect. Let’s review the top 8:

1. Fuel. This includes gasoline, petrol, diesel, motor oil, kerosene, and a different kind of friction reducing products. Its importance is primarily in the fact that it runs every major machinery.
2. Lubricants. A lubricant is a material used to reduce friction between moving surfaces. They help in the running of machinery. Since they have a high boiling point and low freezing point, they can stay in liquid form for long. It scales down the friction of a machine, which results in more efficiency and less overheating.
3. Paraffin Wax. Its main uses are as insulation and lubrication. Moreover, they are used by electric companies to insulate wires from the humidity and other harmful chemicals. It is also used to cover food items such as fruits, and even as a sealant in cans and bottles. The waterproofing quality of paraffin wax is genuinely marvelous.
4. Petroleum Coke. It is a carbon-rich dense material that is one of the leading products which we can extract from crude oil. Pet coke (as it is commonly known) has over 85% carbon and consequently a much larger emission than coal. It is a rich source of carbon dioxide, and therefore we can use it in a lot of industries, especially for as a fuel source for power generation.
5. Asphalt. The primary use of asphalt is in road, bridges, and underpasses construction. It is consumed as an adhesive to bind different material to produce a durable concrete which can be laid down on pavements and roads.
6. Petrochemicals. Petrochemicals are refined from the refineries and are a fundamental component of a lot of products. They can be use in a wide variety of ways. They are either derivable from petrol (also known as petroleum distillates) or chemical products that we can create in a lab. Without petrochemicals a lot of manufacturing could not get done and many plastics would not exist.
7. Sulphur. It is one of the main components of fertilizers. Also, in the manufacture of sulfuric acid. We use it in the pharmaceutical and agrochemical industries. Fungicides and pesticides are sulfur-based.
8. Propane. In gaseous form, propane can be use in a lot of ways. In countries where natural gas is not available freely, people use and depend on propane for cooking and for generators to heat and/or cool.

Oil is a miracle product used in about everything in society, whether it is for driving, manufacturing, an integral part of our power supply, or all the numerous by-products.

With the retail price of gasoline, the average middle-class consumer is being punished. Everyday I read that people are now feeling the pain of much higher gasoline costs, especially those that have long commutes to work as well as the trucking community.

However, it is not just the average US citizen feeling this. I have some friends who enjoy the use of power boats and their own airplanes. Both have told me that they and their friends are cutting back in a big way. Let me give you an example:

One friend with a 40-foot power boat consumes 50 gallons of gasoline an hour. If he goes boating, he will frequently be on his boat for an average of 2.5 hours. That amounts to about 125 gallons. In 2020, this cost him approximately $410+ to be out on the water. Today, it would cost him no less than $750 for the same 2.5 hours. That is an 80% or more increase in fuel charges. He is taking less day trips on his boat.

Another friend has enjoyed using his private jet which he personally owns. Many people use fractional jet service. Either way, the hourly rate for these fancy toys has gone up dramatically. My friend was flying his jet for about $2,100 an hour in early 2021.

Today it is close to $5,000 an hour and climbing (that also includes higher pilot fees, but fuel charges make up a considerable part of the hourly equation). He is now flying commercial and not using his own airplane much.

The price of oil is affecting us all in many different ways. As it climbs, oil has a detrimental effect on the stock market.

Higher costs are getting factored into everything including, but not limited to, the cost of transporting goods, higher production costs in manufacturing, higher power costs for shops, restaurants, movie theaters, entertainment venues, and certainly office buildings. Higher costs for airplanes, cruise lines, hotels, and vacation homes. I could go on and on.

Furthermore, the impact of higher energy prices on agricultural products is profound as fertilizer uses energy intensive products and farmers need fossil fuels to propel their vehicles to actually farm. Increased crop costs also impact livestock production as well.

Learning from history, in 1973, OPEC embargoed oil and the price went from $3 a barrel to almost $12 and that had a major impact on the price of soft commodities. In fact, much of the impact did not hit the soft commodities markets until a year or more after the initial embargo.

It caused massive inflation and stagnation in the global economy for almost seven years. Hence, it is hard to see how this inflationary surge remains transitory as the initial surge in oil costs takes time to trickle through to the general economy.

Higher oil prices will begin to affect the growth rate for US corporations and will inevitably slow down the economy. This, coupled with the Federal Reserve’s plan to rein in inflation by raising interest rates, will surely cause an economic slowdown. Most economists estimate the growth rate for 2021 at no more than 1-1.5%.

Here are a few of the things that you can do to better protect your portfolio from the rising costs of fuel as well as other goods and services in the US:

1. As we mentioned last week, diversify your portfolio. Steer away from 'high-flyers' and high-priced technology stocks, and include value stocks with exposure to financials (benefited by higher interest rates), lower valued consumer stocks, and energy related issues.
2. Hedge against inflation by investing in commodity related stocks and ETFs. We have been in agricultural and energy ETFs for almost a year now.
3. Follow Mish and her portfolio directives. She is much more of a trader and has been able to catch many short-term profitable trades because of her savvy investment style.
4. Integrate the investment strategies that MarketGauge offers, such as ETF Complete, Sector Plus, and others that can diversify you into areas of the market you may not have considered investing in. Recent successful examples include natural gas, coffee, wheat, diversified agriculture, rising interest rates, and others.

Last Week’s Noteworthy Market Conditions - Risk On/Bullish

• 3 of the 4 key indices continued their move higher, with SPY breaking out above its 200-day moving average and QQQ above its own 50-day moving average.
• Volume patterns improved significantly, with 3 of the 4 indices showing more accumulation days than distribution days over the past week.
• The New High/New Low ratio improved for both SPY and the Nasdaq Composite after bouncing back from oversold levels, and it is now sitting in a neutral/positive range.
• Risk gauges maintained a fully risk-on reading across the board.
• One-month vs. three-month volatility (VIX/VXX) significantly improved, supporting the Risk-On scenario.
• The number of stocks above key moving averages improved for the SPY overall, and this is working off the overbought readings from last week while still moving up.
• Growth stocks (VUG) remain in risk-on mode despite value stocks (VTV) closing near all-time highs.

Risk-Off/Bearish

• Both gold (GLD) and oil (USO) regained their 10-day moving averages as a result of continued geopolitical stress and inflationary pressures mounting.
• Agriculture (DBA) hit its highest levels since 2016, a major factor contributing to global inflationary pressures.
• The US long bond (TLT) completed a classic head-and-shoulder top, indicating much higher rate hikes in the near future and the potential end of a 40-year downtrend in rates.
• Commodities/natural resources had a great week along with metals and mining (XME) stocks.

Neutral

• Energy (XLE), up +6.6%, and materials (XLB), up +3.7%, led the rally up. Surprisingly, utilities (XLU), up +2.8%, outperformed the SPY benchmark. It's a bit concerning to see retail (XRT), down -2.6%, and homebuilders (XHB), down -8.8%, moving downward, likely as a result of newly raised rates.
• The McClellan Oscillator on the SPY reached its highest levels since the winter of 2020, an overall positive move up that could also potentially be viewed as overbought.
• The Nasdaq Composite is running even richer than the SPY, hitting its highest levels on the McClellan Oscillator since May 2020.
• An interesting anomaly, utilities (XLU) closed at all-time highs despite its intermarket relationship with SPY being in a risk-on mode.
• Cash volatility is still holding its 200-day moving average and providing an inconclusive reading for the time being.
• Yield curve readings are still looking ominous, with the 2.5-10-year part of the curve now inverted. But other areas of the yield curve are still positive/normal.
• We’re getting a very mixed reading from 'Mish’s Modern Family,' with biotech (IBB) and retail closing at or below their 50-day moving averages, while transportation (IYT) maintained its bullish market phase and semiconductors (SMH) improved to close the week in an accumulation phase.
• Emerging markets (EEM) were barely up on the week, however Latin America (ILF), a subset of emerging markets, exploded to the upside this week--not surprising considering how commodity-centric they are.