Friday, February 12, 2010

Short Oil: USD strength will drive oil down

Over the past six months, the leveraged rise of oil prices has been largely been explained by the drop in the USD despite over two years of continuous slide in demand for oil.

Yet over the last two months the USD has started to shoot up and oil has mildly corrected in kind.

... despite reports of excessive inventory. In fact, some traders are still optimistic regarding oil in the face of these bearish indicators.

Marketwatch reports ...

"The Greek bailout is helping support global markets and the price of oil," [Mike Sander, investment adviser at Sander Capital in Seattle] said. "If Greece was leaning further along to a default, then we would have seen oil break $70 for sure."

The inverse relationship between crude prices and the U.S. dollar has decoupled over the past three sessions, which may continue if the stock market stays strong, said Jim Ritterbusch, president of Ritterbusch & Associates, in a note to investors.

A large build in U.S. oil stockpiles may also be overshadowed by developments regarding the European Union's plan to address Greece's debt issues, he said. "We expect wide price swings in both directions going forward as an unusual crosscurrent of financial guidance will occasionally be butting heads with bearish underlying oil fundamentals."

To think that data from three trading sessions identifies the decoupling of a year long trend is a little far fetched.

But as far as the Greece debt bomb destroying the price of oil, I highly doubt Greece will default either. It is not in the interest of anyone with real money that they do default. But as soon as Greece gets their bailout package, the other PIIGS will come to the trough. The question is not if one can be bailed out, but will all of the countries with debt solvency issues be bailed out. This fear will be enough to drive the market to the USD and put longer term pressure on oil.

Even without a crisis in the making, forecasts for oil consumption are not strong. Whether it is demand fundamentals or technical factors, both provide tremendous demand for the USD that makes the price of oil in USD look very expensive.

This disconnect cannot stand. Oil will correct in correspondence with the new demand for the USD.

The author is short oil by going long SCO April $16 calls purchased at $1.40.

[Oil demand chart in the US]


Lockstep said...

This position was closed with a sale of the contract at 30 cents.


Not a good idea to short oil.