| -Caveat Lector-
Vmann has been on the right track on the
currency issue:
Market-Flash
Weak Dollar and Mideast Politics Influence OPEC Decision
posted on 12/03/03
At the last OPEC meeting in September, the cartel surprised the oil market
with an unexpected decision to reduce oil output going into the peak winter
season for petroleum. As MARKET-FLASH explained at the time, OPEC effectively
adopted the Bush Administration’s policy of “pre-emption” to prevent oil
supplies from rising too fast to sustain favorable prices.
Naturally, the
oil market is concerned that OPEC could carry out another production cut as oil
ministers meet today in Vienna. Once again, the Saudis are signaling that
"pro-active" action by the cartel is necessary to prevent a price decline, and
the market is now expecting a new output reduction sometime within the next 2-3
months.
In addition to supply and demand conditions in the oil market,
OPEC is now very concerned with the value of the US dollar, the currency for
global oil trading.
Reflationary measures carried out by the Bush
Administration (tax cuts and loose monetary policy) have depreciated the US
dollar relative to the euro, yen and other currencies. The rapid surge in the
euro has even led to speculation (in today's Daily Telegraph) that the
European Commission might consider 1970s-style currency controls to prevent
damage to European economies. A senior EU official told the Telegraph
that an exchange rate of $1.35 to the euro "is a likely trigger" for blocking
dollar inflows to the EC.
Meanwhile, reflation has also reduced the
dollar’s purchasing power of commodities, including gold and crude oil. As a
result, the dollar revenues received by OPEC oil producers are worth less in
real terms than in the past. In other words, the $28 that an OPEC oil producer
gets for a barrel of oil today is worth (about 12%) less than a year ago.
Therefore, OPEC producers (and other US trading partners) are demanding more
dollars to compensate for the dollar’s reduced purchasing power.
As Saudi
Oil Minister al-Naimi put it: “The dollar is weakening, you know it's purchasing
power is quite weak, so the price [of oil] is OK."
MARKET-FLASH believes
one possible outcome of the dollar-depreciation story could be an eventual move
by OPEC away from the dollar and toward the euro. Such a move has been
considered by individual OPEC members, including Iran and Venezuela, and was
actually implemented by Iraq under the former regime of Saddam Hussein. A
serious move by OPEC to embrace the euro would cause instability in world
financial markets and greatly exacerbate weakness in the US greenback.
Besides volatility in currency exchange rates, geo-political factors are
also influencing the price of oil, and possibly the decisions of OPEC ministers.
Some analysts saw OPEC's output cut in September as a Saudi shot across
the bow of the Bush Administration resulting from disappointment in Washington's
policies in Iraq, Israel and the aftermath of 9/11. The Saudis were especially
offended by the Administration's refusal last summer to declassify alleged links
between the 9/11 hijackers and the government of Saudi Arabia.
Has the
situation between the longtime allies improved since then? There may be cause
for optimism vis-à-vis Israel, as the Bush Administration has recently signaled
a more balanced position: criticizing Israel's controversial security fence and
settlement building, calling for an end to "daily humiliation" of the
Palestinians and agreeing to meet with Israeli and Palestinian leaders who
conducted the unofficial "Geneva" peace talks.
On the other hand, the
Saudis have signaled this week that they are withholding $1 billion in loans and
credits pledged last month for Iraq’s US-led reconstruction. The Los Angeles
Times described the decision as "a setback for the Bush Administration,
which had hoped that the kingdom would set an example for other Arab governments
by providing vitally needed aid."
The situation in Iraq is volatile as
ever, as US forces experienced their most serious losses during the month of
November. Iraqi oil exports are far below pre-war levels, mostly due to ongoing
sabotage of Iraqi oil pipelines and other oil industry facilities. MARKET-FLASH
notes that Wednesday's apprehension of Amar al-Yasseri, operations director of
Shia cleric Moqtada al-Sadr, is liable to inflame tensions between US forces and
Iraq's Shi'a majority.
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