Curious about how the continued unrest in the Middle East region was impacting the price of oil, we took a look at one-day swings in NYMEX crude futures since the beginning of 2010. We were expecting to see greater volatility in recent one-day prices than what had been the norm for the previous year.
However, we found that the results were, for the most part, incongruent with our intuition. Specifically, we were expecting to see more dramatic increases and steeper one-day declines year-to-date than last year. But with the exception of three days, when uncertainty surrounding Egypt and Libya reached epic proportions (January 28th - Egypt; February 22nd & 23rd - Libya), trading patterns have not breached high and low one-day changes set in 2010.
In absolute terms, changes in day-to-day prices averaged +/- 1.4% during 2010. Year-to-date, the change is +/-1.46% on average, only slightly above 2010's level. If you remove February 22nd (when the maximum one-day movement occurred) from the 2011 average, then price changes this year have actually varied less than 2010 at +/-1.25% on average. Given our incorrect presumptions, this is the phenomenon we are referring to in our title.
Conclusions that may be drawn from the recent price action:
In our opinion, of these three scenarios, speculation on a future increase in the greenback's value versus foreign currencies is the most plausible explanation. Even with QE2, flocking into the U.S. dollar in times of uncertainty as a protective measure is a mindset of the markets that appears well ingrained (sorry to be a spoiler to any Gold bugs out there). As such (barring a major war in the next 12 months), we believe calls by pundits for oil prices above record levels set in 2008 are likely either ill-informed or just grand-standing.
Laurence Fink, CEO of Blackrock, shares our sentiment that the U.S. dollar will strengthen. In an interview with Erik Schatzker on Bloomberg Television this morning, Mr. Fink said, "We believe interest rates will creep up...I am a very big buyer of the U.S. dollar here." Considering that he is the chief of an asset management company that oversees more than $3 trillion on behalf of its clients, we take some comfort in having similar views.
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