Oil & Inflation

Currently oil prices have risen slightly and will likely continue to rise causing inflation in several countries including our own. OPEC has called a meeting for this 6/22 to determine what the “real” cause of the surging price in oil and The Economist 5/29 reports that the oil price is at par with basic Supply/Demand market dynamics. Although it doesn’t really provide any points on the USD effect on all commodities including oil as Bloomberg constantly alludes in several of its recent reports.

Either way these next 3 quarters will show where oil will head and whether my hypothesis is true. Note the following 2 graphs for today’s prices on oil & USD. Again as the dollar falls you see the price oil rising in lock-step.

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http://www.bloomberg.com/apps/news?pid=20601087&sid=aBspSh24d43g&refer=home

6/11/08

OPEC wants a “solution” to end record oil prices and an examination of the role of speculators when governments of consuming and producing countries meet later this month in Saudi Arabia, OPEC’s secretary general said. Heads of state from the Organization of Petroleum Exporting Countries, their counterparts from importing nations and bank executives have been invited to attend the June 22 meeting in Jeddah to discuss record energy costs that Saudi Arabia, the world’s largest oil exporter, says are “unjustified.”

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The June summit is “a fig leaf, a publicity stunt, a symbolic gesture,” Johannes Benigni, managing director at consultants JBC Energy GmbH in Vienna, said in a television interview. “Producers are currently trying to smooth things over and portray themselves as conciliatory.”

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5/29/08

http://www.economist.com/finance/displaystory.cfm?story_id=11453090

AFTER oil hit its recent record of $135 a barrel, consumers and politicians started to lash out in every direction

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As different as these theories are, they share a conviction that something has gone badly wrong with the market for oil. High prices are seen as proof of some sort of breakdown. Yet the evidence suggests that, to the contrary, the rising price is beginning to curb demand and increase supply, just as the textbooks say it should.

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Mr Harris of the CFTC, for one, believes that the oil price is still a function of supply and demand. For the past few years, the world’s production capacity has grown only sluggishly. Meanwhile, demand, especially from the developing world, has been growing faster. So there is hardly any slack in the system. Only Saudi Arabia and the United Arab Emirates are thought to be able to increase their output from today’s levels, and even then, there are doubts, since Saudi Arabia, in particular, is secretive about the state of its oil industry.

That leaves the oil market at the mercy of even small disruptions to supply. Prices tend to jump each time militants sabotage an oil pipeline in Nigeria, bad weather threatens production in the Gulf of Mexico, or political clouds gather over the Persian Gulf.

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http://www.bloomberg.com/apps/news?pid=20601087&sid=ayCGx.vQdkqA&refer=home

6/11/08

Confidence in the global economy fell in June as central banks signaled interest rates may be heading higher, a survey of Bloomberg users on five continents showed.

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Higher rates in the U.S. may herald an end to the dollar’s decline. Survey respondents in Germany, Italy and Spain predict the euro will retreat in the next six months. The U.S. currency has fallen 14 percent against the euro in the past year.

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Record costs for commodities such as oil, natural gas, wheat, corn and rice are driving inflation above central banks’ comfort zones and are replacing the global credit squeeze as the primary concern of policy makers. With the International Monetary Fund forecasting that 2008 will see the fastest global inflation in 13 years, world interest rates may have bottomed out.

India’s central bank raised rates for the first time 15 months today, joining the Philippines, Vietnam and Indonesia in raising borrowing costs this month.

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http://www.economist.com/finance/displaystory.cfm?story_id=11506822

6/5/08

FOR several years two rules have governed America’s dollar policy. The first was that only the treasury secretary talked at length about the greenback. The second was that he repeated a vacuous mantra about a strong dollar being in America’s interests, even as everyone knew policymakers quietly welcomed its slide.

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What is behind America’s new dollar policy and what practical consequences will it have?

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A related goal is to minimise the risk of a dollar rout. The Fed’s rapid interest-rate cuts have fostered an impression abroad that America’s central bank does not care about the dollar. At the same time, Fed looseness has caused headaches for countries, such as many Gulf states, that peg their currencies to the dollar. These countries ought to allow their currencies to rise. But if investors are nervous about the Fed’s commitment to the greenback, such a shift might lead to a dollar rout. As Ken Rogoff of Harvard University puts it, the Fed is “taking advantage of a respite in the financial crisis to shore up the dollar”.

This sows many doubts—not least whether the Fed would, if necessary, back its dollar rhetoric with higher interest rates. For the time being, the signal is about the end of rate cuts rather than imminent rises.

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http://www.reuters.com/news/globalcoverage/energy

http://www.fundmasteryblog.com/2008/06/09/how-far-has-the-dollar-fallen-and-why-whats-next/