Tuesday, March 10, 2009

The Oil Mystery

Oil prices are sure acting strange, romping higher even as the economic news remains mostly dark. Oil prices are nearing $50 a barrel, a level not seen since the beginning of the year. One of three things might explain the move in oil prices: 1. OPEC is succeeding in reducing output sufficiently to support prices. Given the remarkable nature of everything else in the world, maybe OPEC is succeeding where it has failed so often before. Seems hard to believe, though. Budgetmeisters in Iran and Venezuela, among other places, need lots of income from the sticky stuff to make ends meet. Lower prices mean they need to sell more oil than before. Of course, maybe the Saudis are turning off the spigot since higher prices would help Iraq's budget and economic challenges, and that's a serious neighborhood issue. So, maybe the OPEC cuts are more than talk. 2. A weaker dollar can help dollar-based commodity prices, such as oil, rise. While the dollar has enjoyed some support as a reputed haven in times of global crisis, it has traded in a more mixed fashion lately. Could oil prices signal fear of a lower dollar as budget deficits soar? Maybe, but another dollar-sensitive commodity, gold, has been trending lower. 3. The global economy is surreptitiously starting to bottom out and may even be putting in the seeds of a rebound, which would spell more demand for oil. Surreptitious would be the right word for this since the data are still pretty horrid in the U.S. and elsewhere. None of these choices seem particularly obvious. Number three would be most bullish for stock markets and the global economy, at least in the near term. Number one would just represent successful cartel operations and number two would be a harbinger of more difficulty ahead. If other commodities start to edge higher and the dollar remains OK, then the case for option three will grow. But right now a lot of these commodity prices are bouncing around very low levels, so discerning a strong signal remains challenging. Dave Kansas

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