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Morning Note: Consumer Crude Tipping Point

How long before rising oil ruins the U.S. recovery? That was the question on traders’ minds Friday morning as markets wobbled between positive and negative territory in the face of $111 per barrel crude and $3.73 per gallon regular, unleaded gasoline.

Brain Sozzi, Sr. Research Analyst at Wall Street Strategies, is betting oil and gas prices are already near a tipping point for the U.S. consumer. $4 per gallon gasoline would be the breaking point for the U.S. consumer, he said.

“If $4 per gallon happens in Wyoming… that is a tipping point,” Sozzi said in a telephone interview. “Consumers will cut back on the trips to the outlets, the movies, things that are not as close to home as possible.”

Better household balance sheets have kept the consumer from pulling back so far, said Sozzi. Households restructured their debts during the recession. Now, without a large, looming credit card bill or outsized mortgage payment, Sozzi said, consumers have had more wiggle room at the pump.

“Cleaner balance sheets have helped to mitigate the flow from higher costs to eat, drive, watch cable television and keep the lights on,” Sozzi said in an April 8th note to clients.

However, Sozzi cautioned, such budget flexibility only lasts so long. In his note, he cautioned that consumers pulled back sharply before gas prices hit their peak in the summer of 2008. And we are nearing those levels. A gallon of regular, unleaded hit a high of $4.11 on July 17, 2008. The current average is $3.74, according to AAA.

Some traders are betting that oil -- and consequently gas prices – can go much higher than current prices. Chris Motroni, of Heritage Energy, was looking at $123.27 per barrel oil as the next level of resistance. News of more unrest in the middle east could send oil back to 2008 records, he cautioned. “There are not many numbers between there and the highs from 2008,” he wrote in an April 8th note to clients.


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