FYI | Oct 04 2006
Greg Peel
The primary focus of financial markets at present is the oil price. It was a rising oil price that ushered in the last few months of inflation fear and interest rate rises, and was the catalyst to tip over the US housing market. Now, it seems, it was all just a bad dream.
James Williams, an economist at WTRG Economics, summed up the situation last night in suggesting the oil market has "high inventories, high levels of exploration activity, no supply shortage, low consumption at this time of the year and no Gulf hurricanes – with lower chances of having one". (MarketWatch)
Last week the WTI crude price looked like it might be turning back around, as talk was of OPEC producers cutting production to halt further price falls. But now it’s being questioned whether the likes of Saudi Arabia will actually do this. Venezuela and Nigeria may yet, but alone they will not have enough clout to stop what is perceived as back-to-normal for oil.
(US$60/bbl is still a very high price for oil, andUS$50/bbl is not exactly cheap as chips either, but the world is a lot more comfortable with these prices now compared to US$75/bbl).
Lack of hurricanes aside, increasing comfort with the situation in Iran, as the Bush administration becomes more open to negotiation on the nuclear issue, has been the greatest contributor to allaying fears in the shorter term.
It was all too much for the gold price. November crude fell 2% to US$58.68/bbl and a hole opened up in the gold market, sending it tumbling US$24 to US$574.70/oz, driven by panicking hedge funds. The gold market has its inflation hat on at present, and there is real concern support levels will be broken, sending the metal back to the US$550/oz level.
That gold should be so weak on the oil price alone ignores other influences in the market at present, being growing physical demand out of India and the latest nuclear posturing from North Korea.
With falls in oil, gold, copper and nickel overnight, Wall Street decided it was time to start switching out of resources and into financials and cyclicals once more. There are still signs of a significant slowdown in the US economy, but this can be weathered more safely if the oil price behaves itself. Thus while housing may be weak, lower inflation should in theory drive a return to healthy US household spending, thus rendering any economic landing as soft rather than hard.
At least that’s the perception, with many more bearish commentators yet to be convinced.
This was enough to drive the Dow Jones index forward by 57 points to close at 11,727 – a new record.
The evidence suggests there’ll be little chance of records being broken in Australia today, with resources, oil and gold stocks set to take a hit. The SPI overnight is down 34 points.