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Oil, and the Weak Dollar

The oil breakout: Weak dollar and speculative buying spur price moves, but little in the way of fundamentals. Many economists have been despairing as oil and gasoline hit their highest levels since October of last year.

I've often noted the clear relationship between a weaker dollar and higher commodity prices, but this relationship is not exclusive. At some point fundamentals will matter, and right now they are still poor.

Independent oil analyst Bruce Lanni wrote to me late today to say "there is no way that the current (or even near-future) market fundamentals can support a $70 +/- oil price."

Let me quote from his email:

"Consider the following:

1. We have significant surplus spare oil capacity, currently being controlled by OPEC (which as we know as oil prices increase so does the Cartels cheating on quotas).

2. Interest rates have soared and are becoming competitive with the equity markets; not to mention have push mortgage rates sharply higher from about 4.75% to 5.5%+. So refinancing is all but dead and home buyers will find it difficult to qualify.

3. The commercial real estate market has yet to rear it's ugly head, and individual home loans are in the process of resetting.

4. Refining margins are downright awful and we have ample gasoline supplies. Despite this, gasoline prices at the pump are up 60-80 cents per gallon since the low this year, again negatively impacting the consumer.

5. The equity market volume has been low, and euphoria appears to once again have set in, despite the likelihood the global recession could drag on for another 2 years.

While I like the energy group long term, I am definitely a seller at these levels (or even shorting the group).

Bottom line: While the SELL in MAY did not materialize, I would PRUNE in JUNE."

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