Oil Bulls' Biggest Nightmare: A Stronger Dollar

While it is way too early to say that yesterday's rally in the dollar is the start of any real change in trend, it did give some insight to what investors can expect in commodities and oil if the dollar were to actually start going up. In the chart below, we charted oil with the US Dollar index (inverted) over the last three years. While the magnitude of the moves in each asset have differed, the tit for tat relationship between the two has been constant.

While daily 'reasons' for the dollar's move are usually attributed to tensions abroad, refinery utilization rates, inventory reports, etc, investors may be better served looking at the direction of the dollar and paying more attention to what the Fed intends to do with interest rates.

Comments

[JREwing:]

Rising oil pushes the dollar down not the other way around. I can't hear this simplistic 'Ohh, the dollar is down, that's why oil is up!'. What nonsense! Does anyone really think, that oil companies around the world invest billions and billions of dollars to ramp up their production, if the whole oil thing was a bubble with no actual demand? Look at the revenues of the oil service companies over the last couple of years. They have multiplied several times. But did daily production multiply? NO!

But the price of oil will not only push down the dollar, but the Euro as well. The Euro/Dollar trade is the biggest bubble ever. I am here in Europe, and I fail to see what is so appealing about the Eurozone.
We have a lot of public and private deficits, just like the United States.
We import a lot of Energy, just like the United States. The Russians have Europe by the balls, energy-wise, I mean. And the Europeans don't have the military leverage, unlike the United States, to back up their Energy demand. And on top of that Europe is a demographic disaster.

While i am sure that with every Dollar rally, folks will take a couple of bucks off the price of oil, this doesn't change the supply and demand picture of oil.

That is why I don't invest in oil itself, but in the service companies.

My Picks: RIG, NE, SLB, HAL

2008 Apr 25 04:10 AM

[Ames Tiedeman:]

The short term oil correction and dollar rally has begun.

2008 Apr 25 06:03 AM

[NOWHEREMAN:]

Will the demand growth disappear if the dollar rises?

No, it will accelerate...it would mean a stronger economy in the US and added pressure on commodities....especia... the AG softs where the local currencies would see greater prices for food.

The dollar rose and oil did too...someone unwound and others followed...and converted into dollars...big deal.

2008 Apr 25 09:12 AM

[JREwing:]

paultaut, you're spot on!

2008 Apr 25 09:18 AM

[yank:]

Ames:
Your short term correction in oil lasted exactly one day. Oil and gold are both up today whilel the USD is weakening again after a disastrous U of Mich consumer sentiment survey.

Oilnewby

2008 Apr 25 10:17 AM

[jt:]

Is this a comedy tagteam?...or just another mainstream media mouthpiece for TPTB? Anyone in their right mind knows that nothing has changed about the dollar...the Fed continues to create new FRNs out of thin air at hyperinflationary rates (why do you think they stopped publicizing M3 back in March '06?). The latest estimate was that over the past 6 months they have created new dollar value out of thin air to the tune of 37% annualized!!!! I find it unbelievable that the sheeple people of this country believe that you can have a weak dollar one day, and all of a sudden the next day it's strong b/c the Currency Stabilization Fund has bought up dollars on that day to make it look strong while the anti-gold Cartel has done its thing by selling down and shorting gold and silver. The "strong dollar" policy is a complete lie, composed solely of suppressing the price of gold while intermittently buying up (and getting the Fed's G7 "friends" to buy up) the dollar.

It is ALL manipulated now. The PPT has its fingers into ALL market, tipping over TA dominoes in commodities (gold and silver mainly, but on certain days ALL commodities) and buying enough futures in the DOW to break thru resistance levels to create contrived "rallies"...often Hail Mary rallies at the end of the market day. But their main intervention has been in the gold and silver markets...the true monitor of the value (or more accurately the worthlessness) of our fiat currency. There is no "strong" dollar...just suppression of the prices of gold and silver...and mainly on the COMEX, aided by the Fed's/the Cartel's co-players/co-conspira... on the London exchange and the TOCOM (Tokyo). The rest is just talk based on the lies of the MSM.

The markets have become total interventions...and for the benefit of whom? NOT YOU OR ME!!!...but for TPTB...the Fed and the other intl bankers. They love their "printing press" and the fact that they can pay for and manipulate all markets with their funny money, AND THEN GET PAID INTEREST ON THE MONEY THEY JUST CREATED...interest that WE PAY!!!!

Commodities are going up in terms of the dollar for two basic reasons: First of all, oil, NG, gold, silver, copper, wheat CANNOT BE CREATED ON A PRINTING PRESS OR OUT OF THIN AIR and demand for them continue to increase, esp from the BRIC countries, and even here in the US, where driving patterns have barely changed even with the rising gas prices!! Secondly, dollars CAN be!!!...ie, the more that are created, the less each is worth, the more there are chasing FINITE commodities. It IS very simple economic logic.

Don't believe the twisted lies and rhetoric coming from the MSM...esp coming from the mainstream commodities and financial media...it is worse Governmentspeak than ever was in Pravda...and would have done Orwell proud (in a sick sort of way). Do your own research...don't think you know a thing if your main source of information is the MSM.

jt

2008 Apr 25 10:39 AM

[JREwing:]

mmmmh... and i bet Bernanke shot Kennedy 'out of thin air'.

2008 Apr 25 10:45 AM

[JREwing:]

Oil Bears' biggest nightmare - One shot in the Straits of Hormuz.

2008 Apr 25 11:33 AM

[flow5:]

What goes for M2 also goes for M3: M2 erroneously includes MMFs in its definition (a sizable #). MMFs are the customer's of the commercial banks. They are financial intermediaries/transmi... Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries. Whether the public saves or dis-saves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks; nor alter the forms of these assets or liabilities. Financial intermediaries (MMFs) lend existing money which has been saved, and all of these savings originate outside the intermediaries. The utilization of these loan-funds, or the activation of monetary savings held by these financial intermediaries, is captured thru the velocity of their deposits (bank debits/withdrawals), and not thru the volume of their demand deposits. I.e., from the standpoint of the economy, MMF deposits never leave the MCB system. And the growth of the MMFs is prima facie evidence that existing funds/savings have already been spent/invested, i.e., transferred/transmitte... by their owners/savers/creditor... to borrowers/debtors. I.e., this currently (but not for long) represents a double counting and will continue to be so, as long as these intermediary financial institutions don’t practice/conduct a transaction’s deposit business.

It is a succulent irony that professional economists, (those who confuse the supply of money with the supply of loan-funds), thus conclude that increases in the old monetary figure “M3” are inflationary. The conclusion is tantamount to saying, “don’t save money” as savings (which we don’t have enough of) adds to “M3” and therefore has an inflationary bias, when in fact, savings (a large portion of “M3”) is evidence of money that has already been spent/invested. Savings-investment accounts have been lumped into the Keynesian inspired concept of money (just as are MMF funds).

2008 Apr 25 11:45 AM

[flow5:]

Oil is due to turn, if just not because of the seasonal mal-adjustments.
Depending upon the anticipation of the move, the range could be between the FOMC meeting - Apr. 29/30 & May 5th.

2008 Apr 25 11:49 AM

[NOWHEREMAN:]

oil is due fluctuate but not to go down and stay down...agree everyone?

Meanwhile, Gold is oversold and the SPX is overbought...

2008 Apr 26 02:00 AM

[george h.:]

Focus will shift from growth to inflation.
The Fed will be commited to fight inflation and surprise the market with no cut !!!
Result... Dollar up....Oil down....SPX down.....

2008 Apr 26 10:00 AM

[george h.:]

Focus will shift from subprime crisis to inflation.

Fed will have a chance to fight inflation and leave fed funds rate at 2.25 and surprise the bulls.
Result Oil down....Stocks down.....Dollar up....

2008 Apr 26 10:09 AM

[silver-bullet:]

I don't think interest rate is going up anytime soon as the Fed has painted itself into a tight corner. Raising it will cause massive defaults instantly collapsing the entire economy, and with it that of the entire world.

2008 Apr 27 10:48 AM

[phlash79:]

I have one rhetorical question...I keep reading that the US individual savings rate is low...what I want to know are they using outdated criteria...ie how much is in savings accounts? I don't know how they define it but there must be 100's of billions if not several trillion dollars be contributed (saved) into 401K's, SEP's, IRA's etc...as provided for by law...the same monies that are either on the side lines in CD's or Money Market accounts or equities or treasuries...I would say that we probably save more money in this fashion than anyother country in the world...I know between contributions and matching and earnings I built my account well into 6 figures...

And I call it savings for retirement...lol

2008 Apr 27 09:01 PM

[mkreisel:]

When stupid retails are convinced about something, it's time to take the opposite action.

2008 Apr 28 01:29 AM

[EL-GRECO:]

from JT

quote
It is ALL manipulated now. The PPT has its fingers into ALL market, tipping over TA dominoes in commodities (gold and silver mainly, but on certain days ALL commodities) and buying enough futures in the DOW to break thru resistance levels to create contrived "rallies"...often Hail Mary rallies at the end of the market day. But their main intervention has been in the gold and silver markets...the true monitor of the value (or more accurately the worthlessness) of our fiat currency. There is no "strong" dollar...just suppression of the prices of gold and silver...and mainly on the COMEX, aided by the Fed's/the Cartel's co-players/co-conspira... on the London exchange and the TOCOM (Tokyo). The rest is just talk based on the lies of the MSM.
unquote

I have often read this sort of commentary elsewhere, and anyone who follows market action intraday must have noticed all of the activities mentioned by JT; end of day rallies, persistent support around critical levels of the indicies etc.. I understand JP's disillusionment with govt; I guess we all are, and powerless to do anything about it. But why is he upset the market is being artificially supported? Good stock picking still earns you a return above the index, whilst articifical support of indicies prevents 1929-like occurences. The dollar? sure, it's weak. But 10 years ago the euro was 80 US cents, and if you look at various currency relationships over 50 years or so, they appear to have very long cycles of strength and weakness relative to each other; it's true particularly with the majors such as the yen, sterling, and the euro (using the DM as a proxy prior to the euro). Overall its true that all currencies are losing value but that's not the work of one central bank alone.

2008 Apr 28 05:51 AM