Market Report: Dollar, Deficits and Oil

A breakout in oil and what do you get? Another day older and deeper in debt -- about 1.42 trillion dollars deeper. The US Budget deficit screams while politicians fight over ways to spend more money and the dollar loses ground and respect. It's 1.42 trillion dollars deeper and the oil bulls continue to breathe easy up in this new atmosphere as a breakout to the upside has them firmly in control.

Just how much is 1.42 trillion dollars? Bloomberg News reports that $1.42 trillion is more than the total national debt for the first 200 years of the Republic, more than the entire economy of India. Almost as much as Canada's, and more than $4,700 for every man, woman and child in the United States. Is it any wonder why the Canadian dollar is almost trading at par with the dollar? The Federal budget deficit for 2009, more than three times the most red ink ever amassed and the highest as a percentage of GDP since the Second World War.

Bloomberg reports that forecasts of more red ink means the federal government is heading towards spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this fiscal year. Bloomberg reports that Friday's report showed the US government paid $190 billion just in interest over the last 12 months on treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government's total debt rises to $17.1 trillion by 2019. Bloomberg says that without significant budget cuts, that would crowd out government spending in such areas as transportation, law enforcement and education. Already, interest on the debt is the third-largest category of government spending, after the government's popular entitlement programs, including Social Security and Medicare, and the military.

These numbers gave traders very little reason to be optimistic about the dollar. Oil is being caught up in the macro outlook and its fortunes are still tied to the dollar and the perception that the US and the Fed are powerless. Dow Jones reported that Federal Reserve Chairman Ben Bernanke spoke on Sunday, saying that the world financial crisis signals the need for global rebalancing. Dow says that, "Bernanke didn't specifically set out what rebalancing means, most interpret that to mean that debtor countries like the U.S. save more and that countries with surpluses like China spend more."

Other than the macroeconomic outlook, the issue that has been supportive to oil somewhat has been the ongoing situation with Iran and their nuclear program. The Obama administration is looking to get global support for a new round of sanctions. In today's Wall Street Journal they say that, "The Obama administration is encouraging key Arab states to boost oil exports to China in order to reduce Beijing's reliance on Iranian energy and pare Chinese resistance to tougher sanctions over Tehran's nuclear program." The Journal says that, "The administration's strategy has yielded a gain: in a step coordinated with Washington, the United Arab Emirates recently agreed to boost oil exports to China to between 150,000 to 200,000 barrels a day from a current level of 50,000 over the next six months," according to U.S. and Emirate officials. A senior Emirate official said Abu Dhabi plans to make a significant additional increase "within the next three years." Saudi Arabia, long at odds with Tehran, also appears prepared to offer China more oil to make up for any losses it incurs as part of an international effort to punish Iran, according to people familiar with Saudi thinking. The kingdom buys considerable weapons, natural resources and consumer products from China, and is weighing how to leverage those purchases to persuade Beijing to distance itself from Tehran. The U.S. strategy is as much about realigning diplomatic alliances as shifting the oil supply, U.S. officials said." Yet some say that "Many diplomats and Middle East analysts are skeptical that the U.S. and the Arab states will succeed over the long term in breaking Beijing's reliance on Iranian energy.

Saudi Arabia and the U.A.E. are both constrained in exporting oil by quotas established by the Organization of Petroleum Exporting Countries. Industry analysts question how the two countries could significantly boost exports to China without flouting those quotas and flooding markets with excess oil. Washington and its European allies increasingly view China as the pivotal player in an international effort to pressure Tehran economically over its nuclear program. Iranian officials are scheduled to meet representatives from the U.S., France and Russia in Vienna on Monday in a bid to conclude an agreement for the international community to better monitor and manage Tehran's stockpile of low-enriched uranium." A must read in today's Journal. Successful global cooperation on sanctions may be the only way to avoid someone attacking Iran and their nuclear facilities.