The Potential For A Blow-Off Rally In Crude Oil [Exxon Mobil Corporation, Total SA (ADR), Linn Energy LLC, Kinder Morgan Inc]

oil etfsJR Crooks:  With a grain of salt …  That’s how I take market predictions from politicians and policymakers.

Even when I agree with them.

David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, publishes his own commentary and shares ideas from others on his blog.

He’s gained notoriety in the last few years by advocating for free markets and being a vocal critic of America’s fiscal and monetary policies.

I read one of the commentaries he shared on his blog this week. It was inspired by a piece about crude oil and its inevitable demise.

I can only assume Stockman agrees the rally in crude oil cannot be sustained.

I agree.

Errr … well, I will eventually agree.

Crude Oil’s Poor Fundamentals Don’t Matter (Until They Do)

I ultimately trust price action. I rely on patterns that steer asset prices.

So even when I hear something I like — something that “makes sense” — I always come back to price for validation.

The Bloomberg article identifies the obvious fundamental slack in his argument for low crude prices. It boils down to this:

“Global oil production will rise 1.7 percent to 95.1 million barrels a day this year, while demand will increase 1.5 percent to 93.9 million, according to Goldman Sachs Group Inc.”

Supply is high, and demand is subpar of late … particularly in China.

Besides some production uncertainty in the coming few months, everything suggests the recent rally in crude oil can’t last.

Well, maybe not everything.

Market Truths Will Stay Around Longer than You Can Stay Alive

“Markets can stay irrational longer than you can stay solvent.”

I’m sure you’ve heard that before.

I use this truth to make two points:

•  The euro could extend its rally vs. the U.S. dollar, and

•  So could crude oil.

Jack Crooks of Black Swan Capital released a chart Thursday morning showing a three-way correlation between the euro, German stocks and two-year euro-zone yields:

This correlation probably doesn’t mean much to you on the surface.

But wait for it …

U.S. Dollar: The Ultimate Matchmaker

Jack said this in his accompanying commentary:

“We have to consider the risk continued relative U.S. economic weakness could lead to some type of blow-off move in EUR/USD; ultimately planting the seeds of its own destruction, hyperbolically speaking.”

Let me translate: A comparatively “less-bad” euro-zone economy could lead to a stronger euro … which could then lead to a “more-bad” euro-zone economy.

So, Jack is predicting a potential blow-off rally in the euro despite poor fundamentals.

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