Crude Rally Over?

Jim Brown
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Worries that the dollar may continue to grow stronger may have capped the rally in crude prices at $80. With the problems with the Euro ongoing and the British pound setting at nine-month lows the dollar seems like a safe haven even with the U.S. selling mountains of debt every two weeks.

Analysts claim the Fed's move to raise the discount rate last week is the first step in a long line of moves that will strengthen the dollar and make commodities including oil a lot cheaper. You may remember the dollar index fell to just over 70 in 2008 when oil prices were nearing $150. The dollar and oil have an inverse relationship and with the dollar index moving back over 80 last week it was a shock to see crude prices rising.

The analysts claim it was because of rising global demand but outside of China the demand is rising very slowly. For whatever reason the CFTC data showed that hedge-fund managers and other large speculators increased long positions on crude for the first time since early January. Speculative net long positions jumped +63% to 68,436 contracts on the Nymex for the week ended Feb 16th. This was the first increase since the week ended Jan-12th. That rally appears to have stopped at $80 with the March crude contract expiring at the close on Monday.

An analyst at Cameron Hanover said funds covered their shorts last week and switched to longs. Open interest declined slightly to 1.3 million contracts. The short covering could have been due to the expiration of the March futures. Crude had been on a downward slide to $72 the prior week and those still short ran out of time and had to cover. They did not have to go long and that increase in longs is the missing piece of the puzzle.

The derivative market is suggesting the Euro will continue to decline even if the EU bails out Greece. The futures are pointing to a new low for the Euro in coming months. As long as the dollar is the safe haven, oil prices will have a tough time rising.

The Iran premium should return soon. Iran is doing everything possible to aggravate the IAEA, U.N. and the U.S. Iran said on Monday it had earmarked 20 new sites for uranium enrichment and passed the report to the president for his review. The Iranian nuclear official said two new sites would begin enrichment with centrifuges in the coming months.

While most political analysts see Iran's claims as a bluff to increase their bargaining position with the west, there is a good possibility the west will take this opportunity to really tighten the screws on Iran and use their own bluff as evidence against them.

Either way the price of oil long-term should continue to include a security premium over Iran.

Jim Brown