How Long Will Oil Be Priced in Dollars? : By Stephen Clayson

How Long Will Oil Be Priced in Dollars? By Stephen Clayson


LONDON (ResourceInvestor.com) -- With few exceptions, oil is priced in dollars, even when it is produced in countries with diverse economies and major currencies, rather than petrostates with little going on except oil production.

In the latter case, oil that was priced in the local currency would leave it subject to unpredictable swings in response to global oil prices and the output of the country in question.




As it is, a great deal of oil is produced in countries with little to underpin their economies besides oil, so pricing the black stuff in an international currency makes sense, especially when that currency is that of the primary buyer of the oil concerned. It makes things simple for the buyer and lets the seller take its revenue in a major currency.

The situation of primary buyer of the world’s oil is the situation the U.S. has found itself in for quite a few decades now, and in fact the U.S. remains the single largest oil consuming nation. So the fact that oil is priced in dollars is unsurprising.

The result is that virtually every country in the world needs to hold dollars in order to buy oil on the world market. The same goes for large commercial oil buyers. This need for dollars has been a big factor in conferring the premium on the dollar that it has long enjoyed, but is now in the process of losing.

The eurozone economies considered as a whole come a close second to the U.S. in oil consumption, but China probably could tear past both in the coming years.

With the dollar slipping downhill, there is a case for sales to be made in another currency, the most obvious candidate being the euro. Although the oil price moves with the dollar, there is now an unhelpful amount of uncertainty about the nominal price.

Indeed, oil’s approach to within spitting distance of the psychologically huge $100 a barrel mark, although underwritten by extremely firm global demand, is as much about the falling dollar as it is about geopolitical uncertainty. Viewed in euros, the real oil price looks much less scary.

Pricing in euros should make no odds to most of the world’s big oil buyers. And once that switch is made, why not follow suit for the other commodities? Perhaps initially to euros, but then to renminbi as China becomes the biggest buyer of pretty much everything and the renminbi becomes a free-floating international currency.

Iran already sells oil in euros and is leading a push for wider adoption within OPEC. Iran was also planning to set up a euro-denominated oil bourse, although all seems to have gone suspiciously quiet on this front of late. However there is no reason why the idea couldn’t be revived. And if the cause of euro oil sales is taken up by a country less reviled than Iran, then it could see wider adoption.

Venezuela is also an advocate, but like Iran, is not well respected internationally. Saudi Arabia is against any move away from the dollar given its close alignment with the U.S., as well as its large dollar reserves, the value of which will be hurt by a move away from dollar oil sales. Looking outside the Gulf, Russia seems like another large producer that might have little reluctance to start selling oil in euros.

Tied up with this is the issue of the numerous petrostates that peg their local currencies to the dollar. The Kuwaitis have already abandoned their dollar peg in favour of a trade weighted basket that includes the euro in a significant way, and their Gulf neighbours will likely go the same way eventually. Once this is the case, then the logical next step is to sell some oil in euros.

Looking to what this means - even with the base metals complex taking a nasty knock this week, the ongoing degradation of the dollar will assure the gold market of a lively time. And the ongoing shift in the balance of economic power in favour of Asia means that the base metals look pretty decent in the long term. The probable end of dollar oil pricing is just one more dollar bearish factor among many.

Copper

Copper rose the most in a week after inventories plunged in China, the world's biggest user of the metal.

Stockpiles monitored by the Shanghai Futures Exchange dropped 21 percent to 44,855 metric tons this week, marking the biggest decline since the week ended Jan. 25. Copper, used in pipes and wires, has more than tripled in the past four years as demand grew in China, the world's fastest-growing major economy.

Chinese copper use rose 38 percent in the eight months ended Aug. 31, the International Copper Study Group said on Nov. 16. Demand will continue to rise as the Chinese economy accelerates, said Patricia Mohr, an analyst at Scotiabank Group in Toronto.
Copper also rose as U.S. equities rebounded, easing concern that the U.S. economy is deteriorating. The Standard & Poor's 500 Index climbed as much as 1.7 percent. Industrial metals have the highest correlation among all commodities to the equity market, according to Deutsche Bank AG.

Copper still dropped 5.3 percent this week on speculation that slower economic expansion will curb demand in the U.S., the world's second-largest copper consumer.

Federal Reserve officials this week cut their 2008 U.S. growth forecasts, predicting the economy will expand by 1.8 percent next year. Copper has dropped 20 percent since reaching an 11-month high on May 4 as a slump in U.S. housing slowed the economy and reduced metals usage.

Bullion - Gold n Silver

Gold jumped 3.3 percent, capping the biggest weekly gain since July 2006, as the dollar's decline to a record against the euro and climbing energy costs sparked demand for the metal as a hedge against inflation.

The price of gold has surged 29 percent this year, and the dollar is down 10 percent to the lowest ever against a basket of six currencies, including the euro and the yen. Crude oil closed above $98 a barrel, and heating oil climbed to a record.

The dollar dropped to a record $1.4967 against the euro, the weakest since the single European currency's debut in 1999. Gold has rallied during five of the past six bear markets for the dollar.

The dollar index on ICE Futures U.S., formerly the New York Board of Trade, measures the U.S. currency against the weighted values of the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc. The index touched 74.484 today, the lowest ever.
Gold also gained on heightened speculation that the Federal Reserve will lower borrowing costs. Interest-rate futures indicate a 98 percent chance the Fed will lower its benchmark lending rate by a quarter point to 4.25 percent at its December meeting.

The central bank lowered the benchmark rate by 0.25 percentage point to 4.5 percent on Oct. 31, driving gold to a 27-year high of $848 on Nov. 7.

Silver futures for December delivery climbed 31.5 cents, or 2.2 percent, to $14.735 an ounce. The metal is up 14 percent this year.

Crude Oil

Crude oil futures rose in New York, reaching a record closing price above $98 a barrel, on concern fuel stockpiles will drop as the heating season gets under way.

Futures have surged 21 percent in the past two months as the dollar fell and U.S. inventories declined. Supplies of crude oil and distillate fuel, a category that includes heating oil and diesel, fell last week, according to an Energy Department report on Nov. 21. Transactions were lighter than usual today as some traders took a long Thanksgiving holiday weekend.

The Organization of Petroleum Exporting Countries will load 24.5 million barrels a day onto tankers in the four weeks to Dec. 8, compared with 23.8 million barrels in the month ended Nov. 10, Oil Movements said. It will be OPEC's 14th consecutive increase and the biggest this year, according to the company, which tracks shipments.

OPEC, which produces more than 40 percent of the world's oil, is scheduled to discuss crude-oil production for the first quarter of 2008 at a meeting in Abu Dhabi on Dec. 5.

Weekly US Economic Calendar

Week of November 26 - November 30
Date IST ET Release For Consensus Prior
Nov-27 20:30 11:00 Consumer Confidence Nov 91.5 95.6
Nov-28 19:00 9:30 Durable Orders Oct 0.00% -1.70%
Nov-28 20:30 11:00 Existing Home Sales Oct 5.00M 5.04M
Nov-28 21:00 11:30 Crude Inventories Nov-23 NA -1071K
Nov-28 12:30:00 15:00 Fed's Beige Book
Nov-29 19:00 9:30 GDP-Prel. Q3 4.80% 3.90%
Nov-29 19:00 9:30 Chain Deflator-Prel. Q3 0.80% 0.80%
Nov-29 19:00 9:30 Initial Claims Nov-24 NA 330K
Nov-29 20:30 11:00 New Home Sales Oct 750K 770K
Nov-30 19:00 9:30 Personal Income Oct 0.40% 0.40%
Nov-30 19:00 9:30 Personal Spending Oct 0.30% 0.30%
Nov-30 19:00 9:30 Core PCE Inflation Oct 0.20% 0.20%
Nov-30 20:15 10:45 Chicago PMI Nov 50.5 49.7
Nov-30 20:30 11:00 Construction Spending Oct -0.20% 0.30%

US Economy and Currency Update

US Economy Last Week

The Organization for Economic Cooperation and Development said yesterday that losses from U.S. subprime mortgages could eventually total $300 billion, based on an estimated 14% default rate. Mortgage resets are expected to peak in May of 2008 so more will be known as time unfolds. The June eurodollars were unchanged at 96.19.

The Conference Board's index of leading indicators was down .5% in November, weaker than expected. Only three of the ten indicators showed a positive gain with stock prices being the strongest component. Of course, stock prices have not held up since then. The June eurodollars closed up .12 at a new contract high of 96.19.
The U.S. Labor Department said that jobless claims were down 11,000 last week to 330,000.

The U.S. Census Bureau said that housing starts were at an annual rate of 1.229 million units in October, up 3.0% from September's pace and down 16.4% from a year ago. Building permits were down 6.6% in October. March lumber ended down $1.00 at $278.50.

Federal Reserve said that they expect real U.S. GDP to increase 2.45% in 2007, but lowered their estimate for 2008 from 2.62% to 2.15%. They also expect the core rate of inflation to average 1.87% in 2008. The June eurodollars were down .005 at 96.07.
Analysts from Goldman Sachs advised their clients to sell Citigroup, saying that they may have to write down $15 billion of bad mortgages over the next two quarters. Also, a disappointing earnings forecast from Lowe's is pushing the stock market lower. The December U.S. T-bonds closed up 21/32nds at a new contract high of 116.07/32nds.


The National Association of Homebuilders said that their sentiment index was unchanged at 19 in November, the lowest reading since it began in 1985.
Canada's corporations posted C$46.0 billion of after-tax operating profits in the third quarter, up 6.7% on the quarter and up 11.3% from a year ago. Results were especially strong in the banking and oil industries. The December Canadian dollar was up .0023 to $1.0144.

Currency Update Last Week

The U.K.'s Office for National Statistics reduced its estimate of real GDP growth in the third quarter from .8% to .7%. From a year ago, real GDP was up 3.2%. The December British pound ended down .0026 at $2.0585.
In the Euro area (13), industrial new orders were down 1.6% in September, but up 2.0% from a year ago.

Japan's exports hit a record high 7.52 trillion yen in October, up 14% from a year ago. The December Japanese yen finished up .0088 at a new contract high of .9230, helped by its new status as the currency with the least exposure to subprime mortgages.

Retail sales in Canada were down .2% in September, but up 5.4% from a year ago. Excluding autos, sales were up .1% on the month. The December Canadian dollar fell .0049 to $1.0121.

The Bank of England voted 7 to 2 to keep its rates unchanged at the latest meeting.
Consumer prices in Canada were up 2.4% in October from a year ago, down from a 2.5% gain in September. The December Canadian dollar ended down .0006 at $1.0170.
Canada's wholesale sales were up 1.1% in September, stronger than expected. The December Canadian dollar fell .0086 to $1.0176.