A Warning to the "Yeah, But Oil" Crowd

Throughout the course of this inflationary regime, with CPI and PCE both running well above "target," as prescribed by The Fed, for many years now, quite a few folks have countered with the argument that crude oil has not been out of hand or anything close to it. Thus, they reckoned that inflation has been overhyped and the true risk was and is a growth slowdown. The argument most went something like, "Yeah, but oil," in response to most concerns about inflation. 

The 1973–1974 Arab oil embargo saw crude oil prices quadruple in a short period of time, leading to gas lines and reinforcing the stagflationary regime which had started several years prior. We have not yet had that type of event in this cycle to see oil surge which, again, has galvanized many deflationistas (including President Trump) who continue to pound the table for more imminent rate cuts by The Fed to either protect current GDP growth or stave off a recession. 

That said, today we are seeing crude soundly outperform its derivative stocks. On the USO ETF daily chart, below, note crude pushing to the highest levels since last September even as many oil stocks pause a bit at extended conditions. 

Silver and the precious miners are experiencing some expected volatility this week after a brilliant run, as are base metals and miners like copper. 

However, the true wildcard for inflation may still be a crude oil spike yet to come. With oil services and equipment names in the OIH ETF leading the charge higher for months now, the issue is whether they have been front-running a new bull trend in the oil patch at-large. Recall that oil services and equipment are necessary during times of expansion in the oil business, especially. 

Beyond that, there is the issue of positioning. Survey after survey shows that energy remains woefully cheap and under-owned. There is likely a reason why the only real purchases Warren Buffett (not his successor) has made in recent years has been Chevron and Occidental. And it is because he has his much-desired margin of safety in buying these business so cheaply and out of favor here. 

Put another way, oil may currently be in the same spot and gold and silver were a few quarters ago--Steadily improving to little fanfare and largely ignored by the investing world, yet ripe to explode higher and shock the world.