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Will The Price Of Oil Kill The Recovery?

Last updated 6/18/2009 4:46 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Oil is the one commodity whose price is followed not only by traders and investors but by nearly all the citizens of G-10 economies and as gasoline prices in the US rise for 50th day in a row we have to wonder whether the spike in transportation costs will  snuff out the nascent economic recovery. With oil price remaining above the critical $70/bbl level the price of gasoline is steadily inching its way towards the $3/gallon mark. Presently the range in the United States is between $2.55 in the Gulf states and $2.75/gallon on the West Coast.    

As oil creeps higher every penny rise in the price of gas is acting as a painful tax on US consumers and diverting disposable income from the pocketbook to the pump. The US consumer is already burdened with heavy debt load, and a near double digit unemployment rate, therefore the sharp spike in the price of oil is especially painful in the present economic climate.

The latest US Retail Sales data confirms the fact that gas purchases are commanding an ever larger part of the consumer’s budget. Although Retail Sales last month beat expectations most of the increase came from gasoline receipts. Given the fact that between 60-70% of all G10 economies are driven by consumption,  if this trend continues the recovery thesis will come under enormous stress as the year progresses  as all of the inventory building in Q2 of this year by corporations will not find any final demand.  This is one of the key reasons we continue to believe that the rally in risk currencies will have a very difficult time  making new highs as long as oil prices remain at these elevated levels.

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Comments (2)

Satish Shetty

June 18, 2009 at 05:39 AM ET

Hello,
What are risk currencies?

Thanks'
regards
Satish

bschlossberg

June 18, 2009 at 07:44 AM ET

Risk currencies are euro, pound, aussie and kiwi which generally tend to rally when risk appetite increases

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.