wmeubank@ocp.kcmo.com
COMMODITY FUTURES FORECAST
WEEKLY REPORT
Prepared by
Commodity Futures Forecast
Political Energy Volatility
Technically, Iraq can export up to $2 billion bi-annually for humanitarian income. However, the scope of products and services available under the “permission” is deemed too narrow by Saddam Hussein. The oil deal has become a political football in a game between western needs and Middle East pricing policy. Saddam believes he can threaten prices with his pending sales. However, Saudi Arabia holds the “swing capacity” and history proves a willingness to use it.
In 1985, Saudi Arabia demonstrated its ability to control prices by opening its capacity. From a high near $30/bbl. in October, prices plunged to test just under $10/bbl. The move was a political gesture to insure adherence to OPEC production quotas. It was a rude awakening for countries contemplating a break with the established guidelines.
On a current basis, there is no energy shortage nor lack of capacity. The world could easily increase consumption by 50% without taxing pumps already in place. Tight supplies represent an “eco-political” tool that has been difficult to balance since the Gulf War. I am convinced that Saudi Arabia will use increasing quotas and excess capacity as a punishment against Iraq for the war. The lower the price, the more oil Iraq must sell to gain revenue. It can become a “price war” on a grand scale. In addition, Saudi Arabia is sending a message of caution to non-OPEC producers to prevent extraordinary supply problems which might topple their ultimate price control. The subtle undertones to Clinton's recent visits suggest a move toward an “Americas Alliance.”
Why is this an important consideration for now? After all, any such alliance will take months (if not years) to form. I believe energy politics will dictate present pricing decisions. Understand that oil is fundamentally regulated by OPEC. Yes, adverse weather or a shift in consumption patterns can impact immediate prices. However, the sustained interim trends are strictly a supply-based phenomenon.
Liquidity Question
We hear the word “liquidity” in many different economic contexts. Liquidity is a strong driving force behind OPEC decisions. I feel it is increasingly apparent that the world faces a liquidity squeeze. This is evident from Japan's current troubles to the account balances of major oil producers–not to mention the rebuilding of the Eastern Bloc. Last week, I mentioned “deflation” and its potential impact upon markets. As a follow-up, there is a link between liquidity and shrinking prices. Generally, the less money there is, the lower prices adjust.
When liquidity becomes an issue, pressure to accumulate money increases. This is what OPEC faces. Just as important, this is also a problem for the largest non-OPEC producers. Consider that Mexico, Venezuela, Columbia, Equador, and Kazakstan are all on a fast track to boost output and gain liquidity. As each nation seeks its rightful position, prices will suffer.
I have been probing for a top in crude since the summer. Fundamentals suggest spot crude will test below $19/bbl. If the dip manages to take out $18.75, technicals take over to pave the way for a drop below $17. This is one of those rare situations were a consistent downtrend can take hold with exceptional profit potentials. The “panic” price appears to be approximately $16.50. At that stage, producers must either band together to support prices or pump for their lives to save gross revenue.
We continue to hold our short positions from $21.25. With excellent profits already accumulated, I feel comfortable letting the position ride.
Dollar Remains Stable
The U.S. Dollar has maintained its stability and strength through market volatility. This indicates a perception that our currency remains the “safe haven” as the Pacific Rim adjusts to its new economic realities. I am grateful that the dollar's climb has been stable without significant corrections. I was afraid we would see panic “spikes” in value that are often followed by equally dramatic corrections. This makes stop strategy extremely difficult because a conservative stance can kick you out of a highly active market.
Our dollar index position is protected with 120 points of profit. This allows us to become aggressive in trailing the stop for a longer-term trend. I would not be surprised to see the index climb through January. While individual currencies may offer greater volatility, the dollar's overall strength is the backbone of any currency strategy.
Markets appear confused when Japan's equities react positively to bank failure and reverse thereafter. This makes a causal correlation very difficult and dangerous. We are in uncharted waters. Last week I considered the D-Mark/yen spread. It already accumulated significant gains. Yet, the uncertainty over the yen's equity related stability discouraged my analysis. How fortunate for us! The spread did little net movement–just “chopped” around.
I discussed the yen's potential with a currency dealer this week. His view seemed strange. According to his perspective, the Japanese situation was incentive for “currency consolidation.” I was unfamiliar with the term. He believes the crisis will encourage liquidation of international holdings that will bring yen back into Japan. The currency will “consolidate.” This accumulation of yen will bid up its value.
I asked about the basic economic fear associated with the yen. His comment was, “Cash flow... It's all in the cash flow.” The more yen brought back to Japan, the higher the bidding. I am not sure I agree, but he's been trading currencies for more than 15 years.
November 26, 1997Philip Gotthelf
Commodity Futures Forecast
7000 Boulevard East, Guttenburg, New Jersey
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com