Get Out of Logic-Defying Oil While You Can

SOME THINGS I know, some things I don't know. One thing I don't know is why the price of oil is as high as it is.

Ignorance is no basis for an investment strategy. But if you can reasonably and rigorously dismiss every possible good reason why oil is soaring to all-time highs, then it's probably time to sell it.

Over the years I've been writing this column I've made some great oil calls. In October 2005, in the immediate aftermath of Hurricanes Katrina and Rita, I said to short it because I knew the supply shock from the storms wouldn't last. That was when crude oil hit what seemed at the time like a ridiculously high price of $62 per barrel. Today that price would seem like a bargain.

Then I said to buy oil in January 2007. By then the price had fallen to $56 per barrel, so my call from a year earlier ended up being vindicated. My rationale for buying in early 2007 was that I forecasted — correctly, as it turned out — that inflation was about to surge, and I assumed it would take oil and all commodities along for the ride, which it did.

But in March of this year, after the Fed's rescue of the world's financial system after the collapse of Bear Stearns, I said I didn't want to own oil or other commodities anymore. My bet was that the Bear debacle would mark a turning point for the Fed. I guessed that soon afterward the rate cuts would stop, and soon enough the Fed would turn to rate hikes. (As Wednesday's FOMC statement hinted, that's exactly what's going to happen — although the timing is very much up in the air.) That means inflation will start to taper off, so my reason for owning oil was gone.

Oops. Double oops. Oil has risen almost 30% since then, and I missed it.

And what really puzzles me about it is that I was right about inflation. Oh, yes, I know. Suddenly inflation is at the head of everybody's worry list. But that in itself doesn't surprise me. I've been warning about inflation for five years while everyone else was saying it was impossible. So now that it's just about over, everyone's finally latching onto the idea.

I know it's over because all the things that warned me about it in the first place are starting to tell me to stop worrying. Gold, the best inflation indicator of them all, is off 13% from its mid-March all-time highs. The dollar, the second best indicator, is 3% above its mid-March all-time lows. Spreads on inflation-indexed Treasury bonds have collapsed. The yield curve has flattened. It's unanimous.

Well, almost unanimous. There's oil. Up 32% in just a little more than three months. Why? It's not because of inflation. That's been part of the oil story for the last five years, and Thursday's surge was probably connected with some disappointment that the Fed isn't going to be even more vigilant about inflation. But there's no credible inflation scenario at work in the last three months to justify a 32% leap in oil prices.

And it's not because of price-gouging, greedy oil company executives, or any of that populist tripe that has become the daily fodder of Senate and House investigative hearings. And as I wrote here several weeks ago, it's not because of commodity index funds buying up all of the world's oil. That's just plain silly.