Crude Oil Extends its Price Decline

Crude oil extends its price decline today. The black goo is down considerably from its July 11th record high of $147.27 a barrel. At market open today, the price of crude for October delivery was down $2.23 to $107.48 a barrel.

The oil companies in the Gulf shut down 100% of oil production on Monday while bracing for Gustav, but the markets hardly even registered the disruption. CNNMoney.com reports: “Late Tuesday, the Department of Energy decided to loan 250,000 barrels of oil from the Strategic Petroleum Reserve to Citgo’s Lake Charles, La., refinery, according to a statement from the government. The reserve is an emergency repository of 700 million barrels of oil that the government controls.

“‘Demand for oil is 1.2 million barrels a day less than it was a year ago, so a release from the SPR can very easily make up for the lost supply,’ said Phil Flynn, senior market analyst at Alaron Trading.”

A strengthening dollar has something to do with this trend as well. Since crude is priced in dollars around the world, a strong dollar puts downward pressure on the price of oil. In addition, when the dollar is weak, investors rush to commodities as a hedge against inflation. Now that the U.S. currency is flexing its muscles, investors are looking for more profitable avenues for their money.

The greenback is on quite a tear, reaching an 11-month high against major currencies today. Forbes reports that “investors increasingly put faith in the U.S. amid a deteriorating global economic backdrop.”

Yikes...when everyone else is looking so bad that the United States is looking good...you know the world at large is in trouble.

Take the Eurozone for instance. Investors are dumping the euro left and right on data that retail sales slumped more than expected in July. In addition, second quarter domestic product growth dipped to its slowest year-on-year pace in close to 5 years, according to the Wall Street Journal. Today, the euro sits at a low not seen since January.

Our intrepid correspondent, Byron King, offers his two cents on the situation:

This gain in the dollar versus the euro “is evidence of a powerful wave out in the world marketplace.

“What kind of wave? Call it sentiment. Call it perception. Or as Groucho Marx once said, ‘Call it a banana.’

“But the bottom line is that people are buying dollars and selling euros. This is based on their beliefs about the future, and not much else. Really, it’s not as if just one month is enough time for anything major to occur within the structure of either the U.S. or the European economic spaces.

“For example, new industries and labor markets don’t rise and fall in just one month. Tax codes don’t revise within a matter of weeks. Demographic shifts don’t occur in a month. But a month is plenty of time for peoples’ attitudes to change from ‘sell’ to ‘buy,’ and vice versa.

“In Outstanding Investments and Energy & Scarcity Investor, we worry about energy and resources. And in the space of one month, it’s not as if the underlying values of energy and resources are falling. People still need and want oil, corn, copper, etc. (At $107 per barrel of oil, they want less of it, to be sure.)

“But in this summer’s monetary phase – driven by sentiment – the dollar is strengthening. So pricing is weakening for energy and resources and their stocks.

“But really, how strong is the dollar over the medium to long term? Will the U.S. somehow magically balance its budget? Is there any hint that Congress will change the U.S. tax code to make American industry more competitive?

“The dollar is looking good because the alternatives are looking less good. That’s hardly a ringing endorsement for the future. So again, the evidence points to us experiencing a short-term correction.”

Bill Bonner
for The Daily Reckoning Australia

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