This weekend, Saudi Arabia will be hosting an Oil Summit in the city of Jeddah, located on the coast of the Red Sea. They have invited executives from oil companies, leaders of nations and the world’s largest oil producers.
The big question for markets is whether or not Saudi Arabia can drive down the price of oil.
So far, I’m a big skeptic. Earlier this month they announced a 200k barrel increase in oil production, but instead of sending oil prices lower, it sent them higher. The same can be said for the pressure that the US has been exerting on oil producers; oil prices only continued to trend higher. The only announcement that actually managed to drive crude lower was yesterday’s price hike from China and even that sell-off failed to last.
There are 3 things driving oil prices higher:
2. Weak Dollar
3. Supply and Demand Constraints
There will be a lot of finger pointing this weekend. Saudi Arabia is the only OPEC nation with spare capacity. With Venezuela not attending and Iran at odds with Saudi Arabia on whether an oil output hike would matter to prices, OPEC as a group is not expected to hike production. Most OPEC nations blame the oil price rise on speculation.
This Summit is Saudi Arabia’s opportunity to prove to the world that they can increase capacity but what we want to know is how high these oil producing nations think oil prices can rise.
In order for oil prices to start coming down, big changes need to be made and made quickly. Drilling offshore is not the solution because it would be years before we see any results.
How to Bring Relief to US Consumers
If they really want to help consumers, the US needs to propose a similar solution as Italy. The Italians plan on raising taxes on oil companies and giving away that revenue as pre-paid discount cards worth about $620 US dollars to approximately 1.2 millions Italians. Of course, this would only work if the oil companies do not follow suit and raise prices.
If oil prices do not fall after the Jeddah Summit, not only will it keep the dollar firm, but it will also force central banks around the world to remain hawkish.
USA Today has a great guide to some of the issues at play during the oil summit. Here it is:
Here is the “In the Financial Papers Radio Broadcast” (Length: 6:00 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Countrywide plunges to $893m loss
Deutsche falls to first loss in five years – Job Cuts?
Fed set for further cut in rates
Saudis to launch $5.3bn sovereign fund
Opec says oil could hit $200
Blackrock interview on whether gold will hit $1000 per ounce
Soaring Rice Prices Sends Asian Nations Scrambling
US House Prices Fall by 12.7%, the Largest Drop Since 2001
Strong Earnings at Visa and Mastercard ?
EU Growth Could Slow > Eurozone Retail PMI Contractionary
Why the Fed Needs the Dollar to Rally
Here is the “In the Financial Papers Radio Broadcast” (Length: 06:04 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Dollar Fluctuations Make Traders Whisper `I’ Word as Group of Seven Frets
Federal Home Loan Banks May Buy $100 Billion of Mortgage-Backed Securities
Wall Street Firms Eliminate 34,000 Jobs, Most Since Dot-Com Bust of 2001
Commodities Reverse Course on Hedge Fund Profit Taking
Traders Look for Signs of Market Stability
Euro Could Replace the USD as Reserve Currency in 10 to 15 Years
Weakening Dollar Boosts Exports
Inflation in Saudi Arabia Hits 27 Year High
It was a busy night in the currency market! The levels that we have been watching for weeks were tested and in some cases broken. The US dollar fell to record lows against the Euro and came within FOUR pips of parity against the US dollar. The dollar is weaker across the board with even the usually weak Japanese Yen strengthening against the greenback.
Some blame it on Saudia Arabia, others blame it on pure flow. The breaks were inevitable and I have been talking about this for days.
The UK Telegraph had an article speculating on the possibility of Saudia Arabia breaking their dollar peg after they refused to cut interest rates in lockstep with the US Federal Reserve for the first time. If they drop the peg, many Middle Eastern countries are expected to follow suit. I think that politics would play a major role in Saudia Arabia’s decision and because of that don’t expect a rash announcement.
**Latest update. At 10am, Saudia Arabia denied plans to drop the dollar peg
The Canadian dollar also hit another 30 year high. There are many model funds selling at current levels, which makes the break of parity inevitable. Canadian wholesale sales were very hot (up 2.0 percent vs 0.5 percent expected). This is a very strong leading indicator for retail sales. Expect a similar surprise in tomorrow’s number.
Finally King is under alot of heat this morning as he got criticized for the Bank of England’s delayed response to Northern Rock. This seem to matter little for pound traders since dollar weakness was the dominant driver of currency movements. Retail sales was also strong, helping to keep the pound lifted. M&A flow is always good for the pound as well. Borse Dubai announced this morning that they were going to buy stakes in Nasdaq and London Stock Exchange
Bernanke and Paulson are speaking at 10am EST.