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The Emergence of the US Petro-dollarGary Dorsch Trying to pick a profitable trade in the foreign exchange market is similar to judging a “reverse beauty” contest, that is to say, the winner is the least ugly currency at any given moment in time. All paper currencies are ugly, because central bankers print vast quantities of fiat currency, to varying degrees, at the behest of the ruling political elite that appointed them to run the printing presses. “By this means, government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft,” –the late British economist John Maynard Keynes, used to say. In the arcane world of foreign exchange, the axiom, - “the trend is your friend,” – is a reliable piece of advice, since trends in currency pairs can extend for many months, or even years, and often lead to double-digit returns. As such, the US-Dollar Index, which measures the US$’s value against a basket of six major currencies, has suddenly risen +5% higher over the past nine weeks, to above the 84-level, marking its longest streak of weekly gains in 17-years. Many traders are beginning to wager that the US$’s recent bout of volatility is harbinger of a longer term rally that can extend into 2015. If the US$ index can manage to break through key horizontal resistance at the 84.50-level in the days or weeks ahead, it would signal a technical breakout to higher ground. Already, the US$ has rolled up its biggest gains against Japan’s yen, climbing +40% higher from above its all-time lows around ¥76, to a six year high above ¥107 last week. The other currencies in the pack, the Euro, British pound, Australian dollar, Swedish krona, and Swiss franc are also looking uglier these days, but are still hanging around within their trading ranges of the past 2-years. Many analysts and traders were caught off guard by the US$’s recent bout of strength, and as George Orwell used to say; “To see what is in front of one’s nose requires a constant struggle.” The most obvious explanation for the US$’s resiliency is the Federal Reserve’s gradual withdrawal from its Quantitative Easing (QE) scheme. Last year, the Fed pumped $1-trillion of excess US$ liquidity into the money markets, through its QE-3 scheme. However, at its Dec ’13 meeting, - the Fed switched gears, saying it would gradually reduce its injection of monetary heroin to the QE addicted markets. The Fed has reduced its QE-injections by $10-billion /month at each scheduled board meeting this year, to a pace of $25-billion in Sept ’14. The Fed is now entering the homestretch of “Tapering” QE, and will turn-off the money spigot at the end of October, and thereby removing a major headwind for the US$. Economists are now trying to pinpoint when the Fed would begin to hike the federal funds rate from its current range of zero to 0.25%. Expectations of a series of baby-step Fed rate hikes to begin sometime in 2015, were heightened on Sept 11th, with the appointment of the Fed’s #2 chief, Stanley Fischer to oversee the central bank’s all-important “financial stability panel” - otherwise known as the “Plunge Protection Team” (PPT). Fischer’s crisis management skills will be utilized in guiding the clandestine activities of the PPT – as it tries to cushion the US T-bond and stock markets from the fallout of the Fed’s exit from QE-3. A series of baby-step rate hikes to 1% could tip the US-economy back into a recession, or worse yet, trigger a -10% correction in the US-stock market. Even if the Fed gets cold feet and decides to delay the series of baby-step rate hikes, the US$ could still win the reverse beauty contest, because the Bank of Japan (BoJ) and the European Central Bank (ECB) are also expected to keep their lending rates locked near zero percent for years to come. Better yet for the US$, - the BoJ is on a set course to weaken the yen by injecting around ¥5-trillion per month into the Tokyo money markets, through the end of March ’15, and the ECB is preparing to print anywhere from €500-billion to €1-trillion over the next few years, under its “Targeted” QE scheme, which is designed to boost bank lending in the Euro zone economy. Thus, the US$ has the winning edge in the arena of competitive currency devaluations with its trading partners.
The Emergence of the US Petro-dollar, – Yet there’s another less cited reason behind the recent strength of the US$ index and what could auger the beginning of a multi-year advance for the greenback, - the US’s output of crude oil and natural gas continues to surge to new record highs. The US’s production of crude oil has reversed years of decline thanks to the development of shale resources, which have boosted output by +65% over the past six years. The US’s shale boom has allowed producers to unlock thousands of barrels of reserves, putting the US on course to become the largest producer of oil globally, which would dramatically reduce its dependence on imports. US oil output averaged 8.6-million bpd in August, the highest level since July 1986. “US-crude oil production will approach 10-million barrels a day (bpd) in late 2015, and will help cut US imports of fuel next year to just 21% of domestic demand, the lowest level since 1968,” the EIA says. In Q’1 of 2014, the US passed Saudi Arabia to become the world’s largest producer of petroleum liquids, with daily output exceeding 11-million bpd, including crude oil, hydrocarbon gas liquids, and biofuels. In fact, the US would account for 91% of the 1.3-million bpd increase in global oil output next year. The shale revolution has enabled the US to reduce its imports of crude oil to 7.2-million bpd, or roughly -34% less from its peak in June 2005. Over the past decade, the US has reduced its imports of crude oil from Saudi Arabia, Mexico, and Venezuela, by a combined 2.9-milln bpd, while increasing imports from Canada to 2.6-million bpd. With OPEC as a whole, the US’s oil import bill has dropped dramatically, to $5.5-billion per month, on average, compared with its peak outlay of $24-billion in July 2008. Until recently, the Saudi oil kingdom was able to maintain a steady flow of 1.3-million bpd to the US, even as total US oil imports fell by a third. However, Saudi Arabia is now losing market share as the shale boom leaves US-refiners with ample supplies of inexpensive domestic oil. Saudi exports of Arab light have fallen by 452,000 bpd since April to 878,000-bpd in August, the least since 2009.
Since hitting a record of almost 21-million bpd in 2005, US-oil demand fell to 18.5-million bpd in 2013, - the EIA says. Fuel efficiency continues to slice away at demand, and an aging population is expected to drive less in the long run. Gasoline demand had been steadily declining since 2007 as motorists drove less and car fuel efficiency improved. New US vehicles available in showrooms are +20% more fuel-efficient on average, than vehicles introduced five years ago, according to AutoNation. The US’s shale oil revolution has helped to narrow the overall US trade deficit to -$42-billion per month, on average. That’s far less than the average deficit of -$62-billion /month from 2005 thru mid-2008, when the US trade balance was at its worst. The narrowing of the US trade deficit is adding an estimated +0.6% to the US’s annual economic growth rate, compared with a few years ago. And looking towards the future, with the growth in world energy demand expected to increase around +35% by 2030, the US-economy could find itself at close to self-sufficiency in energy. The story line for the US Petro-dollar is bound to get better in the years ahead.The US has more recoverable natural gas than any other country. This represents a century’s worth of output and can support peak production at more than twice the 2013 level. As such, the EIA forecasts natural gas prices will average below $5 through 2023 and less than $6 until 2030.
A Renaissance in the factory sector - The US-economy is the lowest-cost producer of natural gas, and thus, making products such as chemicals, fertilizer, aluminum, steel and glass are more profitable in the US, and will attract manufacturers from around the world, (or to Mexico’s side of the US-border). This creates a stronger base of economic growth than the rest of the industrialized world. Economists estimate that increases in US- oil and natural gas production will create as many as 3.6-million new US-jobs by 2020 and increase economic output by +2% to +3.3-percent. Unlike crude oil, natural gas cannot be easily transported overseas. German and French companies pay almost three times as much for liquid natural gas, and Japanese importers pay even more. Currently, US natural gas is priced at $3.85 per million British thermal units (mmBtu), while Asian importers pay almost $14 per mmBtu for LNG imports. Europe, which relies on pipeline imports from Russia, Norway and North Africa, is priced in between at around $11 per mmBtu. Benchmark UK spot gas prices traded in London are around $8 per million Btu, while Russian pipeline supplies, which are linked to the price of North Sea Brent crude oil, are around $12/mmBtu, Europe’s dwindling supplies of natural gas are increasing its import dependency and its exposure to a global liquefied natural gas (LNG) market where prices are high because of demand in Asia and Latin America. The cheapest pending new major gas source will be the US, which could begin exports of LNG, in 2015. But even this gas, once fees and shipping costs are added, would arrive in Europe at current spot prices of around $9-10 per mmBtu. New supplies expected from Australia, the East Mediterranean and East Africa will also be priced well above $10 per mmBtu. To read the rest of this article, please click on the hyper-link located below: http://sirchartsalot.com/article.php?id=194 ### Sep 15, 2014 321gold Ltd |
