A bit of inflation relief on lower than expected wholesale and consumer prices helped continue a near term shift in the selling the dollar/buying commodities arbitrage trade. How long will it continue?
The lower inflation data gives the Fed more time to stimulate the economy before it will need to raise interest rates. Traders realizing this, began taking profits, helping the dollar to rebound.
RBOB futures led the energy complex lower this past week. Gas inventories showed a greater than expected build leading to a sell off below $2.00 support. Traders will be watching crude's support at $69. Should it give way, we will likely see a further pull back in the complex.
Traders will also be closely watching this week's inventories looking for another large build in gas. RBOB will receive some support for falling prices by the 4th of July driving patterns and as we enter further into the hurricane season. The Iranian protests have the potential to drive the complex higher should the Iranian government increase aggression.
Inflation will eventually take hold in the US. The beginning of price increases has been temporarily delayed. Longer term traders will be looking to take this temporary pull back to put the US$/commodities arb positions back on.
Saturday, June 20, 2009
Saturday, June 6, 2009
US$/Euro and Its Seven Year Influence on Oil
Since 2002 the euro has trended steadily higher versus the U.S. dollar. The same is true of the price of a barrel of oil versus the U.S. dollar. Recognition of the inverse correlation between the falling U.S dollar and the rising price of oil has been used by professional investors to profitable advantage for the past seven years. The correlation pattern will not only continue, the strength of the correlation will increase.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
Tuesday, June 2, 2009
Banking on Bakken
The North American Bakken oil field has been reported to contain up to 500 billion barrels of oil. If true, this would be the single largest oil deposit in the world.
Located in the Rocky Mountains on the Montana and North Dakota borders, the Bakken oil field has been extensively studied and extensively promoted as a solution to U.S. energy supply needs.
The spread out nature of the oil in this formation makes recovering it an expensive task. Those areas where there is some pooling of oil have already been drilled and developed and to date 105 million barrels of oil have come from the site. A recent report from the United States Geological Survey (USGS) has predicted that a maximum of 4.3 billion barrels of oil can be extracted from the area using conventional technology. Possible technology developments such as horizontal drilling may increase this somewhat. The figure for the amount of recoverable oil in the Bakken formation contrasts sharply with the amount predicted to be present. In 1999 the USGS estimated the total volume of oil in the formation to be in the range of 413 billion barrels.
Located in the Rocky Mountains on the Montana and North Dakota borders, the Bakken oil field has been extensively studied and extensively promoted as a solution to U.S. energy supply needs.
The spread out nature of the oil in this formation makes recovering it an expensive task. Those areas where there is some pooling of oil have already been drilled and developed and to date 105 million barrels of oil have come from the site. A recent report from the United States Geological Survey (USGS) has predicted that a maximum of 4.3 billion barrels of oil can be extracted from the area using conventional technology. Possible technology developments such as horizontal drilling may increase this somewhat. The figure for the amount of recoverable oil in the Bakken formation contrasts sharply with the amount predicted to be present. In 1999 the USGS estimated the total volume of oil in the formation to be in the range of 413 billion barrels.
What then can we make of the claims that this oil field is the solution to America's oil problems, and that development of this field will hail the return of cheap gasoline in the US?
The 4.3 billion barrels of oil available in this area must be seen in context. The United States presently uses somewhere in the vicinity of 7 billion barrels of oil each year, meaning that all the oil readily able to be extracted from this formation would last the US less than eight months. This is in contrast to Saudi oil production which is over 8 billion barrels a year and will continue to be so for some time.
The remainder of the oil in the formation cannot be accessed without great effort and expense. Due to this it is highly unlikely that the field will be developed in a major way until oil prices are so high and demand is so great that there is no alternative.
Clearly the Bakken oil field does not qualify as "the next oil boom". Caution must be exercised when considering investing any money in projects that make improper use of the USGS reports on this formation's oil bearing capacity.
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