>>> Currency Wars Are Horrible For Oil Prices
By Chris Dieterich
Barrons
1-11-16
U.S. crude futures plunged again on Monday, knifing underneath $32 a barrel to settle at $31.41, down 5.3%. Monday’s slide comes on the heels of a 10.5% drop last week. Prices for West Texas Intermediate crude oil are at new 12-year lows. The United States Oil Fund (USO) is down for seven sessions in a row, slumping 4.7% in recent trading.
Supplies of crude are sitting at all-time highs and demand stinks. But don’t forget about the rising dollar’s role in the swan dive for basic materials prices.
Morgan Stanley’s energy and agriculture researchers on Monday take the view that recent declines in oil and other commodities have a ton to do with currency, and the strength of the dollar in particular:
“It’s not about deteriorating fundamentals: The USD and non-fundamental factors continue to drive oil prices. Oversupply drove oil to ranges that should slow investment, but it does not set the price level.
Oversupply may have pushed oil prices under $60, but the difference between $35 oil and $55 oil is primarily the USD, in our view.
“In an oversupplied market, there is no intrinsic value for crude oil. The only guide posts are that the ceiling is set by producer hedging while the floor is set by investor and consumer appetite to buy. As a result, non-fundamental factors, such as the USD, were arguably more important price drivers in 2015.”
Recent devalutations from the People’s Bank of China could have massive implications for oil prices, they say. Last week, a Reuters story said that the PBOC is under pressure to let the yuan currency fall by as much 10-15%. Here’s Morgan Stanley:
“If rapid devaluation occurs, a 15% [China Yuan] depreciation alone could send oil into the $20s. …
Future actions by other emerging-market countries to competitively devalue their own currencies to stay a step ahead of Beijing would perpetuate this downward cycle further:
… Anytime the PBOC depreciates the yuan, the trade-weighted USD should only appreciate. As the USD strengthens, it will likely only reinforce China’s desire to depreciate vs the USD. At the same time, many EM currencies also tend to depreciate during periods of yuan devaluation, sometimes intentionally (e.g. Kazahkstan). Such efforts can put more pressure on the PBOC to depreciate further to maintain its trade-weighted basket and competitive position, and thus the cycle continues.
What’s more, a recent Reuters report points to policy makers in China suggesting that a rapid 10-15% devaluation of the yuan may be better than the gradual devaluation, which is viewed as more disruptive for markets and expensive for policy makers.”
A rapid China devaluation scenario could lead to another round of commodity weakness and send oil into the $20s”
The Energy Select Sector SPDR Fund (XLE), Vanguard Energy ETF (VDE) and iShares U.S. Energy ETF (IYE) each slumped about 2.6%, while the S&P 500 declined 0.4%.
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