The oil price rose to $139 on Friday and looked like it was 'spiking' to over $150. But is it? That's a rise of 44% this year. A great deal more than technical chart pointers will be needed to understand where oil, food, gold and silver are headed in this environment. If this is the time when consumer and investor demand will rise beyond supply's ability to provide enough, then this is not a 'spike' but a structural change in the market. It will produce a systemic crisis that has to be resolved in collaboration by the world's governments. Are they capable of such cooperation? The prospect of $200 oil then comes into view.

If national action is to be taken against "investors"/"speculators" by the regulatory authorities to prevent them from partaking in this market, then demand will drop for a while and the present price will be seen as a "spike". But be surprised if this goes below three figures. For this will release oil to the market [the balance between demand and supply on COMEX] but in a relatively short time demand from the emerging nations will inexorably continue to rise and take up that too. That will be if worldwide investment demand is curbed.

With the inventiveness of the U.S. investors, they will surely find a way to protect their assets possibly by taking them abroad and then investing in the same markets [oil and food], unless prevented by Exchange Controls. They do need to do this thoroughly, and not just superficially; amateur attempts will be outlawed quickly. Whatever way it pans out, the collateral damage of such action to the monetary system will still be large and diverse from confirmation of recessions to currency crises. If the controls wait 'until the Fall', as was put forward by some observers to the Senate hearings, it may well prove to be too late and the global economy would require far more than just remedial regulation.

The sheer volume of liquid funds globally will react to oil prices between $150 and $200, to any regulations reaching global investors, and to the weakening of currencies paying more than twice they were at the beginning of last year for their imported oil. Such pressures are more than global, financial stability can bear!

Where is the Oil Market Now?

• Supply

Some tell us that there is a cushion of 3 million barrels a day, but there is little doubt that within a couple of years this cushion will be absorbed by emerging nation's demand. But remember that a large amount of this is in oil that is difficult to refine and unpopular to consumers. That is why the oil market reacts so strongly to threats against Iran [who have said they will suspend their 2 million barrels a day production if they are attacked], or a strike by Chevron's workers that postpone a new supply of 250,000 barrels a day from the new Agbami oilfield, or Norway's suspension of crude output at three platforms, cutting supply by 138,000 barrels a day, or the news that O.P.E.C. oil shipments fell by 1 million barrels per day in the four weeks to May 4, confirming suspicions that the market has been chronically short of supply.

• Demand

Full-year, global oil demand is now expected to total 86.95 million barrels per day, against previous expectations of 86.97 million barrels as higher prices bite hard. Demand for OPEC crude is seen at 31.8 million barrels a day in 2008, down from 32.0 million barrels last year. Non-OECD countries [chiefly China, the Middle East, India and Latin America] are expected to account for almost all of this year's growth in oil consumption. The dramatic rally in oil prices is due to rising demand in China and other developing economies as well as an influx of cash from investors seeking a hedge against the weaker dollar and inflation. The demand from emerging nations will rise to absorb all available supplies in the near future, but the demand from investors has clearly brought that day forward to now. These speculators, however, are not confined to investment managers.

If you were a big consumer of oil, what would you do now? Airlines can't afford to run out of Avgas, so they would buy forward to protect the flow of it to them. Now add to that: miners, other industrial users and the rest. They would buy ahead of their needs not as speculation, but to buy cheaper and ensure supplies and so the demand is brought forward to a time when the supply is available and before it is cornered by the emerging world [which would also buy forward for the same reasons]. This is not speculation or investment buying, but a result of the certainty that supplies will run low in the intermediate future.

Now what about normal consumption demand? The States is entering the 'driving season': the time when petrol demand is at it's highest through the summer so consumer demand is very high right now and it continues to rise.

Now you do your homework as a Pension Fund Manager; you see the collateral damage to currencies [not just the $] and to global growth and you see that commodities, including oil and food, are an excellent alternative to stocks and currencies. You naturally try to protect your pensioners by taking positions in them. Eminent reporters have largely discounted the role that futures buyers have on these prices, but they are real.

All Commodity Exchange will hold sufficient stock to deliver to buyers who cannot be supplied by sellers on their books. If the buyers predominate, an Exchange will not hope that they close their positions before taking delivery. The Exchange officials have to assume that they will take delivery and so hold that amount in stock. They calculate this on a daily basis; therefore, rolled over positions continue to affect these stock levels. If they were caught unable to deliver what had been bought, what then?

Investors/speculators have a very real affect on prices.

But we have not seen any significant affect on the gold price from the oil price since the oil price passed through $90 and gold started to descend from $1,035. Will it from now on? Many feel the oil price is in a bubble, the same that happened to the housing market could happen to oil, and that's why gold hasn't reacted more directly? Wouldn't it be nice if the oil 'bubble' burst? But wouldn't that be unrealistic given the above information?

More to the point is the time the oil price holds these levels. If it persists at this level or higher, the concept of oil being in a bubble evaporates and it becomes a structural cost adjustment in our lives. Once this happens the markets will then readjust gold and silver prices accordingly.

In the final section of this article [for subscribers only] we conclude with what is likely to happen to the gold and silver price from hereon.

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