Are we due for a Leeb oil shock this summer?

If you read my previous post about Myanmar, Iran, and Romney-Paul, and I can’t imagine why you would, you are probably wondering why I glued them all together.

No particular reason, but there is something that might bind them together. Namely, the price of oil this year.

There is a possibility of a Leeb oil shock in the summer, and that tends to have important political consequences. It is not easy to predict, but the possibility does exist. 

Gold/wtic movement suggests possible Leeb oil shock in July 2012

The rise in gold/oil last year was not exceptionally dramatic, but precedent exists for this kind of move presaging a Leeb oil shock. It came from a low below 14.28 in March to rise fairly sharply. If it had gone to 25, I would be more convinced, but it is a fairly significant move.

In order for a Leeb shock to occur, oil would have to hit $150 in the summer. The market fundamentals, however, don’t really seem to be in place for that kind of price.

For one, the copper/oil ratio remains very low. Normally, one might expect something along the lines of 5:1 to be in place before a run in oil. And, the likelihood of copper going on a tear to the upside looks unlikely, too, unless gold is going to drag it up kicking and screaming.

Cyclically, we are entering into the soft spot of a bullish cycle, one that won’t likely end until July. After that, it looks like a powerful rise in interest rates and a decline in the relative price of oil.

It is possible that the rise in gold/oil of last year was speaking to the threat of war this year. It would not be the first time that the gold/oil ratio did something like that, so even if the market fundamentals are not really in place, we have to keep a wary eye on the Persian Gulf.

If a Leeb oil shock does occur, for any reason, I would expect to see political tremors in Myanmar, particularly a confrontation between the newly enfranchised democrats and the army, and a Republican victory in the presidential elections. If the shock occurs due to market reasons rather than political, you can expect a wave of fiscal/political chaos to engulf the Mediterranean and Middle East again. I can’t imagine how Greece could endure a Leeb shock this summer.

Well, more on that later.


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