Dec 18, 2008

another wtf moment

I'm sitting here looking at 1st month crude futures (a proxy for crude oil prices) down 5% to $38. We briefly hit $40 a few weeks back and then bounced. Then more recently the dollar got hammered against most currencies after the Fed basically said it was giving money away for free. Crude oil is traded in dollars but the costs are local (Saudi Arabia, North Sea, etc.) so about 50% of the recent increase of crude to $140 back in June was currency related as the dollar weakened. So one would expect after the dollar takes another hit thanks to Bernanke that oil would go up. But no. We've broken below the past low. WTF? There's a few reasons why this might be.
  1. OPEC cannot hold their production cuts. They generally don't have a good track record of doing this. I think this is very likely but at $40, it can't be this alone
  2. The dollar is going to strengthen implying the ECB and other monetary organizations are going to drop rates dramatically as well. This implies the non-US market is going to tank more than expected.
  3. The US economy is going more into the tank than we can possibly imagine.

Actually it could be all 3 of these. But those last two are not pretty thoughts.

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