Oil Is Breaking Out To New Highs, And Inflation Expectations Are Following Suit (USO)

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April 20, 2018 6:46am NYSE:USO

Image of an oil derrick with blue sky

From Bryce Coward, CFA: After spending the last four months consolidating gains, crude oil is breaking higher again, and it’s taking inflation expectations with it (charts 1 & 2).

The break higher in crude isn’t surprising given that oil fundamentals haven’t been this good in years. Neither is the break higher in inflation, which we expect to tend towards 3% over the coming quarters for headline CPI and 2.5% for core CPI. The two are related, of course, to the extent that rising oil prices feed into inflation. Still, it’s helpful for investors to receive confirmatory signals from multiple asset classes of a particular outcome, in this case rising oil prices and higher inflation expectations. At this juncture, it’s also noteworthy that gold – an obvious beneficiary of higher inflation expectations –  is at the top of its multi-year trading range, but has not yet broken out of that range (chart 3). A sustained move higher inflation expectations could be the catalyst that pushes gold to multi-year highs too.

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The United States Oil Fund LP ETF (USO) rose $0.07 (+0.51%) in premarket trading Friday. Year-to-date, USO has gained 14.65%, versus a 0.76% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #35 of 113 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of Knowledge Leaders Capital.

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