September 27, 2018
success: rise early, work hard, strike oil.”
--J. Paul Getty
the Dollar – Oil correlation get back into gear?
1. During the hay days of the US-China symbiotic commodities for shrinking dollar boom there was an extremely tight negative correlation between the US dollar and oil prices, i.e. as the US dollar pushed lower and lower into its final cycle low in 2008, crude oil went higher and higher peaking near $147.
2. Then an event called the Credit Crunch reared its ugly head and changed all that. Oil, as you know, tumbled and bankrupted many who believed the trend was their friend and got caught up in the Peak Oil story—a nice piece of fiction.
3. Then global central banks got busy reflating the global economy unleashing massive amounts of money and credit, plus zero-bound interest rates, onto the market. That reflation worked until 2011 as oil peaked and the dollar put in a test of its lows. But despite all the debt dumped into the global economy, real growth, which would have driven oil prices higher, didn’t materialize. Instead, all the money rushed into financial assets and avoided real assets like the plague.
4. Reflation fails. Oil tanks and the dollar soars.
5. Five years after reflation failed to stimulate the real economy (though the financial economy is flying) oil makes a low in 2016; then nirvana. The US economy starts to respond to sensible policies: tax cuts, regulation cuts, and fiscal stimulus (not quite as sensible) ushered in by President Trump’s administration (despite the ongoing protestations from the most over-rated economist who ever lived—Larry “I am somebody” Summers. Real growth again. Surprise, surprise, surprise. to paraphrase the late great Gomer Pile. Party time for oil as it rockets off its lows in 2016.
6. Now we come to today. Though we don’t expect some kind of sea change event similar to the credit crunch (one never knows when a correction is going to morph into a rout), we do expect the trade conflict between the US and China to intensify. I suggest an excellent piece in today’s WSJ story--An Economic Cold War Looms Between the U.S. and China; this game is strategic, not tactical, and it will most-likely become more serious and dangerous in time. This is not the raw material of vibrant global growth and soaring demand for oil
So, what do we expect? We expect the negative correlation between oil and the US dollar to kick back into gear. And because we are dollar bulls, we are naturally oil bears.
President Trump is already pressuring OPEC (read Saudi’s) to pump more oil and try to push prices lower. He has leverage. US support for the Saudi three-year Yemini war is waning as civilian casualties and reports of human rights abuses by the Saudi’s accumulate. Quid pro quo? Pump more oil or we pull US support for your Yemini quagmire?
(Oil futures wave chart below)
Nov. Crude Futures 240-min Chart: Expanding flat setup anyone?
Chief Market Strategist DHF.
George Town. Cayman Islands.