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Will the Dollar – Oil correlation get back into gear

Business

Quotable

“Formula for success: rise early, work hard, strike oil.”

–J. Paul Getty

 Commentary & Analysis

Commentary

DXY

Chart Analysis/Comments/Guesses:

  1. During the hay days of the US-China symbiotic commodities for shrinking dollar boom there was an extremely tight negative correlation between the US dollar and oil prices, i.e. as the US dollar pushed lower and lower into its final cycle low in 2008, crude oil went higher and higher peaking near $147.
  2. Then an event called the Credit Crunch reared its ugly head and changed all that.  Oil, as you know, tumbled and bankrupted many who believed the trend was their friend and got caught up in the Peak Oil story—a nice piece of fiction.
  3. Then global central banks got busy reflating the global economy unleashing massive amounts of money and credit, plus zero-bound interest rates, onto the market.  That reflation worked until 2011 as oil peaked and the dollar put in a test of its lows. But despite all the debt dumped into the global economy, real growth, which would have driven oil prices higher, didn’t materialize.  Instead, all the money rushed into financial assets and avoided real assets like the plague.
  4. Reflation fails.  Oil tanks and the dollar soars
  5. Five years after reflation failed to stimulate the real economy (though the financial economy is flying) oil makes a low in 2016; then nirvana.  The US economy starts to respond to sensible policies: tax cuts, regulation cuts, and fiscal stimulus (not quite as sensible) ushered in by President Trump’s administration (despite the ongoing protestations from the most over-rated economist who ever lived—Larry “I am somebody” Summers.  Real growth again.  Surprise, surprise, surprise. to paraphrase the late great Gomer Pile.   Party time for oil as it rockets off its lows in 2016.
  6. Now we come to today. Though we don’t expect some kind of sea change event similar to the credit crunch (one never knows when a correction is going to morph into a rout), we do expect the trade conflict between the US and China to intensify.  I suggest an excellent piece in today’s WSJ story–An Economic Cold War Looms Between the U.S. and China; this game is strategic, not tactical, and it will most-likely become more serious and dangerous in time.  This is not the raw material of vibrant global growth and soaring demand for oil

So, what do we expect?  We expect the negative correlation between oil and the US dollar to kick back into gear.  And because we are dollar bulls, we are naturally oil bears.

President Trump is already pressuring OPEC (read Saudi’s) to pump more oil and try to push prices lower.  He has leverage.  US support for the Saudi three-year Yemini war is waning as civilian casualties and reports of human rights abuses by the Saudi’s accumulate.  Quid pro quo?  Pump more oil or we pull US support for your Yemini quagmire?

WTI Nov. Crude Futures 240-min Chart:  Expanding flat setup anyone?

CLX

fx street



2 Comments on "Will the Dollar – Oil correlation get back into gear"

  1. rockman on Sat, 29th Sep 2018 10:49 am 

    “Oil, as you know, tumbled and bankrupted many who believed the trend was their friend and got caught up in the Peak Oil story—a nice piece of fiction.” Talk about a nice piece of fiction stories like this still try to perpetuate the idea that the petroleum pushed the PO “story” to drive themselves and investors to plunge ahead with a drilling surge. The Rockman was very active throughout this period and heard many industry presentations by both buyers, sellers and potential investors. And not once, I say again, NOT ONE F*CKING SINGLE TIME, did I hear the term “peak oil” used. Maybe common in some Wall Street houses and websites like this but not in the oil patch.

    What pushed all these companies was visions of big profits or increased prices of their stocks. We are pretty much single minded in that way. LOL. As far as bankruptcies causing severe damage to the Industry nothing is farther from the truth. Companies came out of Chapter 11 in much better financial condition. Some in even GREAT SHAPE: some of the most currently active companies with big credit lines came out of Chapter 11 bankruptcy. The Rockman has explained in excruciating detail many times so won’t waste time again. Look up “Chapter 11 bankruptcy” for an education. But those Chapter 11 filings did cause big damage to some: unsecured money lenders…especially bond holders. For the most part the oil patch doesn’t care about them. When prices recover there will be more ready to extract those high interest rates once more from us.

    But many companies that didn’t file Chapter 11 came out of the period with huge debts that ate up much if not most of their now reduced income thanks to lower oil prices. And continue to pay those high interest rates to their bond holders. Typically 3X to as much as 5X the current Fed rate.

    But I said “much if not most” meaning they still have some net income and are still in business. And now that oil prices have increased they are becoming more active thanks to increased revenue AND credit lines. And pubcos have seen their stock prices rebound.

    So, have those pubcos seen the error of their ways and changed their business plans? Hell no! LOL. They have no choice: there are no other significant viable options for them other than continue to develop those unconventional reservoirs. But what if oil prices eventually crash again? Easy answer: history will repeat itself. But is that a surprise: this has been the cyclic nature of the petroleum industry since Col. Drake poked that first well 159 years ago. The latest phenomenon…the shales. But it has happened in the past with conventional onshore reservoirs, offshore conventional plays and foreign oil plays.

    Petroleum companies perpetuate themselves by developing petroleum plays when the economics allow it. We have no other reason for existing.

  2. print baby print on Sat, 29th Sep 2018 12:47 pm 

    Rockman could you please explain to me is the Ghawar really one bottomless giant pit or I am plain stupid.

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