Expiring today, crude oil for July delivery slips to 68.4 in European morning as strength in USD, huge supply in motor fuel and downgrade in economic forecasts fueled worries about demand growth outlook. Increased tensions in Nigeria and Iran failed to support price. The most actively traded August contract plunges -1.7% to 68.7.

The dollar rises to 1.385 against the euro after the World Banks said economy will contract by almost -3% this year.US Treasury yields also surge as led by 10-year notes. The government will auction $104B of 2-year, 5-year and 7-securities this week.

There has been much analysis about the linkage between oil price and the dollar. Apart from the inverse correlation between the 2, causation probably runs from both directions. First, decline in dollar increases the purchasing power over oil of non-USD countries and raises their demand on oil. Moreover, as dollar weakens, it increases dollar production costs for oil companies whose costs are not denominated in USD. This forces the oil producers to mark up oil price more.

Rise in oil price will pressure USD lower. As oil exporters earn more revenue from selling oil, their reserve accumulation increases and they need to purchase a large amount of currencies (other than USD) to maintain the portfolio. This causes USD to depreciate further.

Last week, the US Energy Department reported a surprising huge gain of 3.39 mmb in gasoline inventory. This really hurt sentiment and subsequent decline in gasoline price led decline in the energy complex. We believe investors will continue to use this as an excuse to sell down crude oil price as the rally above 70 in previous week was overdone.

Tumbles in oil stocks made UK's FTSE 100 Index fall for the first time in 4 days. The index plunges 1.4% to 4286 in the morning as Royal Dutch Shell and BP, together making up 17% of market value of the index, drop around -2%. MEND, Nigeria's main rebel group said over the weekend that it attached offshore oil fields of Shell.

Gold price plummets to as low as 920.7, the lowest level in a month. The precious metal seems to have lost upside momentum in the near-term as pressured by USD's rebound. US Congress approved the IMF sales authority through the War Supplemental bill last week. However, we do not think the sales will have real significant impact to the market,

More details about the sale agreement. Currently holding 3217 metric tons of gold, IMF is the third largest official holder of gold. However, gold sales is limited to around 403.3 metric tons, equivalent to one-eighth of the IMF's total gold holdings, as recommended by the Crockett Committee.

In order to avoid market disruption, gold sales will be phased over time. Moreover, the IMF will follow the recommendations by the Crockett Committee stated as follows:

  • The Committee recommended a firm limit on the volume of gold sales as a key safeguard, given the IMF's standing as the third largest official holder of gold.
  • The Committee recommended that the IMF's gold sales should not add to the announced volume of sales from official sources. Hence, the IMF's gold sales should be coordinated with current and future Central Bank Gold Agreements (CBGA). (Under the current CBGA, a group of European central banks have agreed to limit their gold sales to no more than 500 metric tons annually.)