Oil's Hotter Than a Middle Eastern Desert

Submitted By John Bougearel

Temperatures in the Saudi Arabian Deserts are around 93 today. Crude oil reached 111 this week and prices are hovering around 109-110.

The more the Fed intervenes save the frozen credit markets from utter financial collapse, the colder the US Dollar gets. The colder the US Dollar gets, the hotter crude oil becomes - and so on.

Wall Street investors initially greeted the Fed injection of $200 billion with a huge sigh of relief this week. The announcement restored confidence in both the US Dollar and US equity markets. Unfortunately, the restored confidence was fleeting. Analysts panned the Fed measures, and the very next day, the dollar was off to new lows and crude oil off to new highs.

Citigroup chimed in saying "credit concerns are likely to persist and averting a drawn out recession is becoming increasingly challenging." All hopes for the dollar were dashed by several comments like this amongst financial analysts at several big firms today. And so resumes the crisis of confidence in the US dollar - equilibrium to this dollar crisis was thus restored.

By the end of this dismal week, Bear Stearns cash position had deteriorated so badly (half their entire portfolio is mortgage-backed) that the NY Fed and JP Morgan had to perform an emergency bailout. Bear Stearns CEO Alan Schwartz on March 14th that "our liquidity position in the last 24 hours had significantly deteriorated."

Think about that for just one moment and just let that sink in - will you. Bear Stearns liquidity position suddenly deteriorated overnight! Bear Stearns liquidity nightmare validates the grave concerns of analysts at both Citigroup, Goldman Sachs and elswhere.

As long as the Crisis of Confidence in the US Dollar persists in the first half of 2008, Crude oil prices will remain "En Fuego" and little to impede it from challenging 120 in Q2 08. The chart below illustrates one point, namely that the rate of change off the Jan 07 low is as strong as the rate of change off the Nov 2001 low following 911. Unfortunately, against what I had hoped, without a restoration of some sort of confidence in the US ecoonomy, there is little reason to expect long crude oil hedges protecting themselves against a the eroding purchasing power of the US dollar will lift their hedge positions in any meaningful way over the near term.