Watch Consumer Spending To See Where Crude Oil Prices Should Peak

Crude oil & gasoline prices have been a hot topic for almost everyone. As inflation surges, consumers feel the increased pricing pressures from all sides. It is starting to reflect in the use of credit cards, discretionary spending habits, and summer holiday travel plans.

As the US Fed adjusts rates to burst inflation trends, consumers are left to navigate a minefield of unknowns.

• How far will the Fed have to raise rates—and how quickly?
• Will this affect the jobs/housing markets?
• How will this affect credit/borrowing costs?
• Will a US recession risk a more significant collapse in US jobs/economy, creating broader consumer issues?

The natural reaction of consumers at times like these is twofold. First, they pull away from making huge purchases. Second, they watch every penny spent. Therefore, we are seeing consumer discretionary spending, auto sales, vacation rentals, and other expenditures falling sharply.

I remember watching the iShares US Consumer Discretionary ETF (NYSE:IYC) collapse throughout most of 2007-08, just before the Global Financial Crisis (GFC) hit. As the US Fed continued to raise rates in 2005-06, and as the US economy started to weaken, consumers acted like a “canary in a coal mine”—pulling away from normal spending habits as fear and uncertainty levels rose.

What I found interesting about the rising Crude oil prices at that time was that they appeared to compound the speed at which consumers pulled away from the economy. This resulted in a much more aggressive collapse eventually.

As you can see from the Crude oil/IYC chart below, Crude oil rallied more than 100% (from $70 to above $140) while consumers were pulling away from the economy. The speed of the rally seemed to push consumers further away from normal activities. In a way, this is like a self-fulfilling price event.

Are we seeing the same thing happen right now?

h2
IYC COLLAPSED MORE THAN -34% ALREADY – ARE WE AT PEAK OIL NOW?/h2

When the GFC finally hit, IYC collapsed another -55%, and Crude oil fell from $147 to $33 ppb, more than -77%. The GFC resulted in one of the biggest market declines since the Great Depression.

The increased volatility and peak in oil prices seemed to take place as the end of an excess phase bubble was starting to unwind. Consumers were already pulling away from the economy at that time.

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IYC has been falling since early November 2021 (for over 7 months). Crude oil has already risen from $62 to $130.50 (more than 100%). This begs the question: have we already reached peak oil prices while the consumer discretionary sector is nearing a major breakdown event (see chart below)?

h2 THE THREE FACTORS AT PLAY: CONSUMERS, REFINERS, US FED/h2

In 2008, when the GFC crisis started, the factors that initiated the collapse were related to consumer/institutional/global finance and credit markets. The US Fed played a role by raising interest rates above 5% while the excess of the housing market boom (an excess phase bubble) started to unwind.

Now, we have different factors at play. Consumers are still doing what they do—reacting to the fear and uncertainties of a changing economic future while trying to provide for their families. The US Fed is still a major player in this equation—attempting to raise interest rates to combat inflation.

This time, COVID and supply-side issues drive some aspects of Oil/Gas price levels. Yet we also have to understand the excessive stimulus and capital creation that has taken place over the past 3+ years.

In some unique way, the current global economic situation is not that different from what was taking place in 2006-08. The primary difference this time is the COVID virus event and supply disruption across the globe.

h2 $120 PEAK OIL APPEARS LIKELY – WATCH IYC FOR A BREAKDOWN/h2

Watch IYC for any continued breakdown below $60 as a sign that the US/Global economy and oil may also start to break down. Remember, consumers are the “canary in the coal mine.” We will likely see a big shift in consumer spending and how much credit they are using to pay their bills before we see a big breakdown in Crude oil.

Watching IYC move lower over the past 7+ months and seeing the -34% price decline recently suggests the $120 Crude oil price level may be the critical resistance level going forward. Watch for oil to retest and fail near $120 as confirmation of this potential peak level.

Written By: Chris Vermeulen