Oil surged back over $100 Friday after traders sensed the U.S. Treasury / U.S. Federal Reserve's plan to stabilize the financial markets by buying-up distressed / bad mortgage debt could very well boost inflation, increasing the attractiveness of oil as an inflation hedge.Oil rocketed up $4.91 to $102.79 per barrel Friday morning. The other major energy commodities also jumped Friday. Unleaded gasoline rose 9 cents to $2.57 per gallon, heating oil climbed about 10 cents to $2.88 per gallon, and natural gas gained 11 cents to $7.72 per million BTUs.
Energy Trader Jim Dietz told BloggingStocks Friday slowing global economic growth that's likely to slow the increase in global oil demand is the oil market's long-term concern, but short-term the focus is on inflation.
"I haven't seen the details of the [U.S.] Government's plan yet but there's three ways we can pay for it. We can increase government spending, print money, or sell government bonds," Dietz said. "The first two can increase inflation quickly, the last one, not as quick, but either way, there will be some increase in inflation, which is why traders are buying oil. Inflation now will jockey with global growth concerns to determine the direction of oil's price."
Dietz added that there are two ways the U.S. Government's mortgage debt purchase will not be inflationary: First, if Congress passes a large tax increase, Dietz said. "But that's not likely, and will be even less likely if [Republican Party presidential candidate U.S. Sen. John] McCain wins," he said. Second, if almost all or most of the government's assistance is paid back through re-sale of the assets, the government's net outlays would be low, he said. Dietz added that he was currently flat, or had no open energy trading positions.
Oil Analysis: Dietz added that he expects oil to tread water around $100 for the next week or so, until energy traders and energy users can assess the full cost of the U.S. Government's bail-out plan, its bond repurchase time-table, and the program's funding mechanism.
Further, the view from here is that while no one wants to see an increase in oil prices and the rise in inflation it implies, to borrow a business executive's phrase 'a little inflation beats a lot of deflation, every time.'
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