Schork Oil Outlook: Dollar + Euro = Crude Bear

"…even a short suspension of payments on principal or interest on the Treasury's debt obligations could … damage the special role of the dollar and Treasury securities in global markets in the longer term. Interest rates would likely rise…"

-Ben S. Bernanke
Annual Conference of the Committee
for a Responsible Federal Budget
June 14, 2011

Indeed, as Mr. Bernanke observed, interest rates would likely rise on a disruption to the U.S.’ debt obligations. However, political brinkmanship notwithstanding, interest rates are about to rise anyway.

For instance, China has lost its appetite for U.S. debt (especially short-term debt) since the Fed went ahead last fall with a second round of quantitative easing. The country has slashed its holdings of U.S. T-bills by 88% since last October; from $45.9 billion to $5.7 billion as of March 2011. What’s more, overall holdings of U.S. debt by China has dropped by 2½% (to $1.145 trillion) since the peak in October 2010.

Thus, when coupled with the end of QE2 this month, the Treasury will have to sweeten the pot, as it were, to entice others to purchase its debt. According to the Monthly Statement of Public Debt, by next May, Treasury will have to redeem $1.58 trillion of T-bills. With China and the Fed now scaling back their buying, short-term interest rates will have to rise to court other buyers.

Keep in mind, the Fed’s balance sheet has blown out from $867 billion on August 22nd, 2007 to over $2.8 trillion as of a week ago. Thus, as our friend Dennis Gartman pointed out in his letter yesterday, the Fed’s solvency will be questioned, i.e. after the inevitable rise in rates trashes the bank’s holdings. However, this event will pale in comparison “… to what shall happen to the ECB’s balance sheet when… not if, but when… Greece defaults.”

Bottom line, while the current fiscal woes in the U.S. will continue to weigh upon the dollar, so too, shall the ever dissolving situation regarding the ECB’s PIIGs. As such, the U.S. dollar is weak, but the euro € is worse off… and that, The Schork Report is advising clients, is bearish for crude oil.


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.