Crude futures are up 80% from their $32 low this year. The main drivers of this upward trend has been a combination of increased demand from China, and investors using crude as a hedge against inflation.
China's economic stimulus package is focused heavily on infrastructure spending. Huge government projects to build roads, pipelines and bridges, helped drive the Baltic Dry Index up over 100% to its current 2211. China is also storing vast amounts of crude at what they perceive are low prices.
Investors in crude are also driving prices higher as they seek protection from certain coming inflation. The 10 year treasury yield is now up to 3.3% from 2.5% just a few weeks ago.
A 6% yield on the 10 year note is when things will get very interesting. Investors will find equities not worth the risk, if they can lock in a 6% return by owning debt. Also, should interest rates continue their climb, the US Treasury will find it even more expensive to cover the budget deficit. This will lead to more purchase of debt by the Treasury to try to hold interest rates down. The printing of money in this fashion will lead to higher inflation, which will continue to support higher crude prices.
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