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Euro Rebound Oil Price Rebound

Commodities / Crude Oil Jul 19, 2010 - 12:26 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleSince the start of July, the euro has stormed back to a backdrop of increasingly clear US-Europe economic fundamentals, that is weak US recovery and very weak recovery in Europe, with massive sovereign debt and government deficits in both regions. The currencies in play, the US dollar and Eurozone 16 Euro, are twin pillars of fiat money printing excesses, but at this moment, if the Euro is a Fiat currency, the US dollar looks more like a Trabant currency.


The USA's near-recession and fragile recovery is accompanied by extreme high State debt and budget deficits in the "USA-50", the 50 States of the USA, as well as Federal debt and deficit, generating a total for unpayable debt even larger than the already huge debts of the EU-27 states. In addition, the USA's trade deficit is truly structural and up to 4 or 5 times higher than the EU-27's "semi structural" trade deficit. Completing the FX trader kit for playing a quick Euro rebound, total stocks of fiduciary and other state-owned, state-accessible gold, in Europe, are considerably higher than gold stocks of the USA - powering the surprisingly strong, surprisingly fast euro rebound.

These economic fundamentals should not favour growth of the oil price over and above price growth due to US dollar depreciation and devaluation, but should uplift gold prices. However, this runs against the present and special context, where a discredited and fantasy-prone paper asset trading space has reached escape velocity. Rotating outside the real economy, its always shaky logic is more Black Swan prone then ever.

Euro rebound can and likely will drive a rebound of the oil price, in any currency or relative to "classic hedges" such as government bonds, gold and the gold price. Outside the USA and Europe, the real economy is moving forward on its steel wheels and airplane wings, meaning oil, coal, gas and uranium are running out of fashion a lot slower than fiat paper moneys. Oil traders, while staying very careful about when they think WTI futures can break the most-recent high, of USD 86 a barrel achieved in April, have moved back into net long positions. On the US Nymex market these rose about 65 percent in week ending July 16, the largest one-week rise since February 2007, according to the US CFTC commodity futures watchdog. Gold however lags back in this move to real resource hedging.

THE BLACK SWAN
Supposed fundamentals for both currency and oil traders, including outlooks for economic growth, car production, airline movements and airplane orders, as well as employment, debt and other indicators like inflation and interest rates are small beer in a maybe "secular movement" away from equity stocks and shares. The most basic "pure market" sentiment driver on all major stock exchanges and finance markets in OECD countries presently features reasonable and increasing doubt on the overall or general value of equity stocks and shares.

If equities start to lose investor confidence, and government bonds and other paper offers derisory low yields, this makes commodities, led by oil more interesting simply because they are a "default choice", due to the dearth of any other reliable assets to play with.

This outlook is reinforced by the carefully ignored, downplayed change of global finance markets since the 1980s and 1990s. Apart from globalizing, one other basic change, for oil, was the end of bilateral, physical-based oil supply contracting, offset and compensatory trading, and secondary trading, replaced by upstream "purely financial" futures based trading. Today, oil trading, and trading of all other commodities, exactly like trading of government bonds, currencies and corporate equities, are merely inter-related parts of a semi-uniform and global "common asset space". The proof of this comes almost every day when equities move higher on major markets like the Nikkei, NYSE, Dax or LSE - the same day, oil prices will also rise. Any day the US dollar tends to fall in world value, both oil and gold prices will tend to rise

This is unless the real economy data is very bad, in which case only gold will tend to rise, and unless the Euro-Dollar circus moves in unpredictable, unwanted directions, as at present.
 
Linkage and inter-dependence of tradable assets across global finance markets is stoically defended as a stabilizing and "visibility" raising influence, tending to prevent price break outs either way - high or low - until and unless special conditions and pressures are in play. These are classically defined as major geopolitical crises and change, such as US and NATO troops being pulled out of Afghanistan, when or if this happens, or major geopolitical crises in other world regions. Sudden and unexpected economic or financial crises are also allowed in, as special factors able to rapidly change relative asset values.

Liberal economic defenders of the global common asset space will sing in unison that it means stability and transparency - but its main defect is that it only reacts, and cannot anticipate. When changes happen they are usually violent and large, and are sometimes called "Black Swan" events after the excellent book written by Nassem Taleb. As Taleb underlines, the effect of large, complex, highly geared or debt-based, inter-related and inter-dependent asset spaces is simply to smother real economic fundamentals. This makes markets very fragile when changes occur - because the change can only be unexpected, large and rapid.

The 2008-2009 global financial crisis, and economic crisis in the OECD countries, occurred almost without warning, was violent, large and very fast. Market anticipation was at best confused. During the run-up to full blown crisis, in 2007-2008, oil prices increased to high levels and can easily do so again. As in that period, due to the global common asset space, the change will start slowly, then grow radically, with little advance warning.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2010 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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