Lately it seems as if commodity traders are not trading oil (or other commodities); in reality we’re trading the euro. And the euro is trading off of the Greek debt crisis.
It’s no coincidence as the euro collapsed 300 points one week ago on Wednesday, there was a concurrent collapse that day of $4 in crude oil prices. In recent weeks the oil and euro currency charts look similar.
The common wisdom is if the Greeks actually do implement austerity this will curb inflation to an extent and hurt growth thus impacting crude oil prices negatively. Of course, it is not the Greek economy that’s the main issue, the Greeks are merely the canary in the coal mine. The belief is if the Greeks can do this, Spain, Portugal, Italy (actually the whole of Europe) can too and this contagion of sensibility could then spread across the Atlantic as well.
Greece has until the first week in July to agree to all out austerity if they want to get their next “fix” — I mean installment — of another 12 billion euro loan. There is no disputing the Europeans do have a real financial mess here. Germany, France, and the IMF (partly funded by the American taxpayer) have all been Greek bond buyers. So there will be a real problem if Greece defaults, but the truth is their economy is unable to repay these loans in your lifetime or mine. The Euro will suffer sooner or later when there is finally closure and the inevitable default.
And if the Euro declines the Dollar rallies, not because the $ has good fundamentals but because it is the mirror image of the Euro. Since oil is priced globally in dollars, a stronger dollar equals weaker oil prices. At least that’s the common wisdom, but common wisdom is not necessarily wisdom that will enrich you.
This is because the longer term oil fundamentals remain bullish. Global production is declining in major oil producing countries (Mexico, Venezuela, and the North Sea). Global energy demand remains stable and is still growing in China and India. If not for slowing demand in the U.S., world demand would be increasing overall as supplies are decreasing. And the majors are not at this point able to fully replace this lost production. Bottom line, financial unrest could result in a price break in crude in the short run. The short term trend appears to be down at present and I would not rule out a break below $90 support…however it will likely turn out to be a buying opportunity!
George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: firstname.lastname@example.org. Phone 800-233-4445
George is hosting a live seminar in LA with two other master traders. Get the details here: http://www.centuryoftrading.com/