RIGZONE - Market Report: Macroeconomic Forces Take Control of Oil Prices

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Market Report: Macroeconomic Forces Take Control of Oil Prices

by Phil Flynn

Tuesday, November 03, 2009

Holy manufacturing smoke! The ISM blew away expectations and almost took oil out of its pre-Fed apathy by posting a 55.7% expansion which was the best since April 2006. The production index also soared to a five year high as well in a broad based recovery that transcended even the cash for clunkers program. That followed some strong numbers out of China as well.

Is it possible that the impact of the weak dollar is leading to a surge in US manufacturing of goods to countries that are eager to acquire goods that they can pay for with cheap US dollars? Could this mean that we will see job creation in that sector leading to a better than expected jobs number on Friday? Is the recovery more than smoke and mirrors? And if it is for real, does that mean the Fed policy of a federal funds rate at 0 to 1/4 percent for an extended period could be coming to an end?

Yet despite this and other strong economic data, oil seemed to rally somewhat reluctantly. Oil is still being controlled by larger macroeconomic forces and not just demand and demand expectations. The main concern is still all about what the Federal Reserve might do as they start their two day meeting. Will the Fed maintain its eternally low interest rates? Ok maybe not eternally low but a policy of federal funds rate at 0 to 1/4 percent for an extended period.

While the party line is that the market expects no changes out of the Fed and its statement overnight, oil is backing off as the dollar is coming roaring back after Australia's Reserve Bank raised its benchmark lending rate by a quarter percentage point to 3.5 percent. The second increase by Australia is raising speculation that the flood of global economic stimulus may be coming to an end. Whether or not that is true the dollar is getting a boost hitting the highest level since October off of those fears ahead of the Fed.

Does anyone in the oil patch care about the latest on Iran? The AFP reports that Iran's supreme leader Ayatollah Ali Khamenei said Tehran will reject any dialogue if its result is pre-determined by the U.S. This raises the possibility that the proposed nuclear fuel deal may be derailed.

WHAT DO YOU THINK?

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Hugo Ruadez | Nov. 4, 2009

India purchase of 200tn of gold from the IMF will be bring the USD down. Australia raising of lending money rate to 3.5 % could indicate, as this article suggests, that economical recovery is near by reducing global government stimulus. By having a cheap USD the US could increase production of goods for export, this can reduce unemployment and get the US out of the recession. Are other countries willing to buy cheaper products instead of producing themselves? Do they have enough dollars to buy from the US? Why is India is changing cheap US dollars for gold? What about if China, which has a lot of US dollars in reserve, starts buying gold also? China is making huge investments in oil, even in the US GOM in a partnership with Statoil. Oil demand is low, but for how long? OPEC wants higher oil prices, but demand is weak, but, again, for how long?

This all looks very complicated to me. I am not an economist, but we are in a global market that will need oil in the near future, and you cannot process gold to produce something else like gasoline, but keep it in vaults at the central banks; gold does not create jobs, except in SA mines. In the long run the key thing is to reduce unemployment, which will increase inflation. So my bet is on increasing oil prices in the near future. Other energies are not available for now, so we have to use oil.

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