Liquidity-driven euphoria shifting from Stocks to Commodities

In a situation eerily reminiscent of early 2008, the new-found flood of liquidity appears to have found its way into the energy complex. Liquidity-driven trends need a story. In early 2008, it was "exploding M3 money supply". Today it is the Iran war story that speculators seem to have latched-on to. European Sovereigns/Financials/Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. Silver and Gold remain the major outperformers YTD but the rest of commodities - most notably oil is catching up very fast having overtaken stocks this week. 

From Zerohedge

As John Burbank of Passport Capital described, its possible that the oil complex does not stop until the US economy's back is broken. It would be difficult for the Fed to enter a tightening cycle in an election year, especially since they have clearly broadcast a loose monetary stance until 2014. Similar to early 2008, commodities (led by crude oil) can have a blow-off move that lasts for a few quarters and pushes marginal consumers over the edge, thus tanking the recovery. In 2008 high oil prices probably sparked the financial crises by pushing over-leveraged borrowers into default. This effect is qualitatively different from blow-off moves in say, precious metals, which are driven by sovereign & financial worries but don't affect the real US economy. Or high food prices, which are more of an issue for emerging markets than the US.

With LTRO 2 already priced in, and the Fed having been handed the baton of printing by the rest of the world's central banks this weekend at the G20 meetings, we suspect the liquidity will remain pumping in Oil until the CME steps in with margin hikes or some major earnings disappointment.

Technicals

In the Weekly chart below, there is a clear breakout. It is now very likely that the breakout surpasses the 2011 high at 115 and goes on to target the upper trendline of an Expanding Triangle. A price equal to the 2008 high at around 150 is possible, and maybe even higher. Any escalation of the Iran situation will just add fuel to the speculative fire. Weekly RSI is nowhere near overbought, indicating that the bulk of the move lies ahead of us. MACD too has plenty of room to run.