A Debt Defying Drop
Oil prices fall and gold prices surge as the US debt talks appear to be going nowhere. The Democrats and the Republicans have gone their separate ways and hot money is running to Asia, Switzerland and the safe haven place of their choice. The odds of QE3D may be rising, the dollar is falling and stocks and oil could take a debt defying drop.
As the so called debt deadline comes close the Republicans and the Democrats are falling further apart. Yet the markets action is showing some restraint as it believes that a deal should be cut and at the end of the day the Treasuries are still a safe place to be. Oil is under pressure as it is concerned that the uncertainty can reduce demand. At the same time the dollar seems not to be as weak as one might think.
The market obviously believes that this political “high noon” will end with Democrats and Republicans walking hand in hand into the sunset. Yet despite a short-term drop in oil, a debt default will be bullish! The Fed will be forced into a QE3 and the dollar would get trashed. Hot money would cause a surge in demand as the Chinese and emerging economies would seek to spend all of that money that is being thrown at it. Of course it is also likely that a US default may cause the International Energy Agency to reconsider its stance on an oil release. With central banks already flooding the market with liquidity they may want to try to flood it with oil as well.
The Financial Times reports that the Iranians and the Chinese are getting even chummier and have created a trading system where the Chinese get oil and the Iranians get goods. No word on whether the goods will be knockoffs or officially licensed. The FT says that some Iranian officials are growing increasingly angry about the inability of the country’s largest oil customers to pay cash, a problem that has contributed to a shortage of hard currency and has hindered the central bank from defending the Iranian Rial, which has been sharply devalued over the past month. So instead of cash I guess the Iranians will accept Ironic Phones.
The FT says that those problems with payments caused Iran to threaten India which owes Iran $5bn for oil but has not been able to move the money out of an escrow account to Tehran. “Unlike India, which exports almost nothing to Iran, China is dominant in Iranian business and could use a barter system to balance trade between the two countries.”
How hot is it? Natural Gas traders know! Reuters News Reports that a “massive heat wave dominating much of the United States this week drove population-weighted cooling degree days to a record high on Thursday and could set another record Friday, according to a report by MDA EarthSat Weather. The private forecaster said total PWCDDs on Thursday climbed to 16.25, easily surpassing the prior high of 15.94 set in July 1980 and the highest since records were kept in 1950. Cooling degree days – a measure of how much the mean daily temperature is above 65 Fahrenheit (18 Celsius) – are used to estimate energy requirements for air conditioning or refrigeration. They are then weighted to reflect population differences in specific states and regions.” This should lead to a small injection of about 50.
At the same time we have to watch another disturbance in the Atlantic. The National Hurricane Center says that “The North Atlantic...Caribbean Sea and the Gulf of Mexico... Disorganized showers and a few thunderstorms over Hispaniola...eastern Cuba...and the southeastern Bahamas are associated with a tropical wave. Significant development of this wave is not expected during the next couple of days as it moves generally westward near 20 mph and interacts with land. This system has a low chance...10 percent...of becoming a tropical cyclone during the next 48 hours. Locally heavy rainfall and gusty winds could spread westward across Cuba and the central Bahamas during the next day or so. Elsewhere...tropical cyclone formation is not expected during the next 48 hours.”
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
