Market Report: Macroeconomic Forces Rescue Oil Prices Once Again

Maybe the economy isn't so bad after all. Thank you sir may I have another? Oil prices knocked for a loop after last Friday's jobs number came struggling back as the rest of the commodity complex brought the petroleum markets back kicking and screaming. A rebound in the non-manufacturing number from the Institute for Supply Management took away some of the sting from last week's dismal jobs report.

Oil tried to ignore the ISM non-manufacturing number that showed that the service sector grew in September for the first time in a year, yet with all of the outside macroeconomic forces and commodities screaming higher in just about every other sector, it was not to be. The index rose 50.9 percent from 48.4 percent in August giving us hope that perhaps there may be some energy demand after all. Now, throw in some rumors about the dollar's dominance and we saw oil fail to break the rock solid support at $68 a barrel and propel itself back into its endless trading range. Oil is moving lower but not in real terms but in dollar terms as nations are rumored to replace the dollar as its means of trade.

Don't you hate it when people talk behind your back? Well that's what supposedly is happening to Uncle Sam! The UK Independent writes that, "In the most profound financial change in recent Middle East history, Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar." The ingrates! They say that, "Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars." What? The Independent says that, "The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years."

Yet Dow Jones and Reuters are casting doubts on the story. Reuters says that, "Big oil producing nations denied on Tuesday a newspaper report that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in trading oil." It said that, " top officials of Saudi Arabia and Russia, speaking on the sidelines of International Monetary Fund meetings in Istanbul, denied there were such talks." Dow Jones reported, "OPEC member Kuwait is not looking to replace the U.S. dollar with a currency basket in the trading of crude oil, a member of Kuwait's Supreme Petroleum Council." "It's highly unlikely because Saudi Arabia is still in the peg with the dollar and so is the U.A.E., so it is difficult for me to believe," Imad Al Atiqi told Zawya Dow Jones.

Yet whether it is true that there were secret talks or not, what is true is that these countries are dismayed with the dollar or should I say record budget deficits and trade deficits. They are tired of the dollar getting smashed and want to see a US exit strategy from its excessive stimulus. With Australia raising rates we know that the time is getting closer to remove the training wheels from the economy and that should crush commodity prices across the board.

Yet in the short run with oil and the rest of the commodity complex screaming you cannot ignore what is. So once again outside macroeconomic forces save oil from collapsing under the weight of massive over supply. Oh sure, maybe you can argue that if the service sector improves we may see some more jobs created or maybe we are just hoping against hope. I guess it is hard to stay bullish all day as the dollar gets pounded in Post G7 silence and rumors about the dollar's demise. The lack of commitment by global leaders to support the dollar seem to give the market place the illusion that high prices for goods does not matter and in fact may be what they want still fearing a return to deflation. With a market like cocoa soaring to a 18 month high and grains getting a bid of frost fears and precious metals becoming more precious by the minute, somehow oil can ignore its massive oversupply. That is until the first sign of stability in the dollar. Petroleum is the weak sister in the commodity world and when we break, it should be the leader to the downside.


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