Dollar Drops, Crude Rises

Jim Brown
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The dollar continued its five-day decline from the highs set on May 23rd and closed at a three week low on Tuesday. The falling dollar helped to push oil prices higher despite signs of slower growth from China and Australia and mass confusion over the European debt crisis.

It was one of those days where traders didn't know whether to go long or go short. There was no clear-cut indication so the falling dollar ended up being the force behind the move. After closing at a two month high on May 23rd the decline has been very rapid. The euro closed at a three week high despite a scramble to take care of the problems in Greece, Ireland and Italy. The activity has been so frantic it appears investors have more confidence something will now get done sooner rather than later. The "when all else fails throw money at it" solution will always allow them to kick the can a little farther down the road. The key here was Germany giving up on its demands for stronger measures and saying it would allow a second bailout of Greece. EU leaders have ruled out a total restructure of the debt.

The escalating problems in Yemen, a nation that borders Saudi Arabia, appear to be escalating. If not solved soon the uprising has the potential to destabilize the entire region.

In Libya NATO stepped up bombing raids against Gaddafi but despite the increase in bombing he claimed he would never leave the country and die a martyr if necessary. That suggests it will be a long time before oil production is restored from that country.

It also helped price to hear that the pipeline from Canada to Cushing Oklahoma had to be shutdown for repairs. Less oil flowing to Cushing even of a short period of time will take some pressure off the storage problem. The problem was a leak at a pumping station.

The EIA is expected to show crude supplies declined by -1.8 million barrels when the inventory is reported on Thursday morning. Both the API and EIA reports will be delayed by one day due to the holiday schedule.

OPEC is set to meet on June 8th and the various oil ministers are taking their daily turn in the spotlight with press comments about potential production changes. Qatar's oil minister said there was "no noticeable urgency" for OPEC to increase production quotas. The market is "well supplied" with supply, demand and prices becoming stable.

Potential demand problems also reported on Tuesday but nobody seemed to notice. China's Purchasing Managers Index fell to 52.0 for May from 52.9 in April and 53.4 in March. China is ok with the slight decline in manufacturing activity as they try to slow inflation.

The HSBC London based survey of 400 companies showed a slight decline in output and new orders in May. The HSBC index declined slightly to 51.6 from 51.8. Definitely not a meltdown but it confirms what we are seeing around the world.

Australia reported its economy declined by -1.2% in Q1 as a result of the unprecedented flooding that wiped out exports of coal and iron ore. Australia also relies heavily on China to buy its raw materials so a slow down in China is critical for Australia. Fortunately even with China's minor decline in May they are still growing at around a +7% pace.

The U.S. economics were the worst. The Chicago PMI (ISM) declined to 56.6 in May fro 67.6 in April This is a horrendous decline but the Chicago area was hit very hard by the parts shortages caused by the Japan earthquake so analysts discounted the bad news.

The Consumer Confidence for May also fell sharply from 65.4 to 60.8. That is the lowest level since November and home prices, high gasoline prices and slowing gains in employment were blamed.

Despite all these negative factors I still expect oil demand to continue higher longer-term. There are too many positive factors that create demand and they will overshadow the negative factor of price at the current level. Should gasoline rebound over $4 it would be a different story entirely.

Jim Brown

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