How far will crude oil go before reality sets in?
The EUR/USDcross has failed to hold support, but crude oil has yet to respond. The euro currency is down 1½% thus far this week against the U.S. dollar. Given the strong correlation between the EUR/USD and oil (Brent) prices, 0.8249 as of last week, it would not have been unreasonable to expect knock-on weakness to crude oil values.
On the other hand, who ever said markets are reasonable? Spot Nymex gasoline has rallied 6% since the IEA announced its intention to pad the market. We doubt that that was the reasonable response the IEA was looking for.
Meanwhile, yesterday the Chinese government announced yet another interest rate hike in its Hobbesian quest to manufacture the mythical “soft” landing. As Phil Rizzuto would say… for you kids keeping score at home… that is the fifth hike since October.
China’s key 1-year lending rate is now at the highest high, 6.56%, since the fall of 2008.
Hmm…the fall of 2008? In today’s issue of The Schork Report we reflect on what was going on in the market back then:
… after six straight interest rate hikes by Beijing through the last three quarters of 2007, consumer inflation in China finally peaked in the first quarter of 2008.
However, the crude oil market did not get the message until the second quarter 2008.
At that point, it was all over for oil bulls. By the fourth quarter 2008 spot Brent crude oil futures were trading below $40/b… i.e. a 75½% (!) correction from the third quarter 2008 high print… and China’s key rate had been cut by 214 bps.
In other words, Beijing’s attempt in 2007 to cool its country’s economy worked… and the globe sank into recession.
Beijing’s autocrats are scurrying feverishly to collar inflation and yet, the crude oil market is shrugging them off. Are we now in the midst of a sequel to the 2008 disaster movie?
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.