The Energy Report - What's the Difference?

By Roger Baettig | July 06 2012 9:59 AM

Oil supply may rise or fall like they did in yesterday's Energy Information Administration report. But what matters to oil more than anything else right now is the differing rate expectations as the EU and China cuts rates, the UK prints and the United States intentions are still a big question mark. No critics will point to the supply and demand numbers and claim that somehow the market has divorced itself from the fundamentals but by doing so, they really are ignoring the most important fundamental of all and that is the relative value of the currency that you are using to price that precious barrel of oil. Despite the bluster and blow of the Iranian regime and the threat by Stat-Oil to lock-out oil workers, shutting down a substantial amount of North Sea production, the trumping factor in yesterday's trade was the break in the Euro and the rally in the dollar.

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Of course just saying that the dollar rally was the reason the oil market was able to ignore some normally bullish fundamentals really misses the gravity of what these central bank moves mean to the global economy. This surge of stimulus could make or break the global economy oil demand and the scale by which we measure value.

If the US stands pat, the dollar should continue to soar putting downward pressure on oil. So if today's jobs number is terrible, instead of oil being bearish on lowered demand expectations, it should rise as the odds that the Federal Reserve will join the rest of the world in a printing party. On the other hand, if the jobs number is a blockbuster then the odds of a QE 3d will fall. The Fed then may just try to accept the stimulus of falling oil prices as stimulus enough.

We have of course come full circle in this crisis. In 2007 it was the Fed that was taking steps to lower rates and stimulates the economy while the rest of the world was in an ignorant bliss. That set the stage for one of the greatest commodity blow-off tops of all time. The reluctance of Europe and China to grasp the seriousness of the crisis in the United States caused the dollar to tank and commodities to soar until they realized that the sub-prime crisis was just the tip of the iceberg of a world that had built up unsustainable debt to what were unsustainable growth expectations.

Now one must wonder whether it is Ben Bernanke that is underestimating the risks of European defaults and a slowdown in China. Without the participation of the Federal Reserve, the markets in Europe and Asia are saying that stimulus on only two fronts is not going to be enough. Or maybe more ominously perhaps the market is saying that you are not going to be able to print your way out of this mess.

Regardless it is clear that oil's fortunes, and perhaps all of our fortunes, are riding on the outcome of today's jobs report!

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