Oil dancing around debt and inventories

No fault default

While Washington seems to get further away from a debt ceiling resolution the markets are pricing in additional risk and both sides are blaming each other. Senator Harry Reid is blaming the Tea Party and says that Speaker Boehner’s plan is not a compromise and Harry is so upset he keeps repeating himself by saying “Democrats will not vote for it, Democrats will not vote for it.” I thought his needle was stuck and someone would have to nudge him to get him to stop repeating himself. Yet not only will Democrats not vote for speaker Boehner’s plan, Tea party Republicans may balk at it as well. USA Today reported that a, “ review released Tuesday afternoon by the Congressional Budget Office said the bill would only reduce the deficit by $850 billion over 10 years, or $1.1 trillion assuming that current spending on the wars in Iraq and Afghanistan continues. Boehner had said the plan would cut $1.2 trillion in spending over 10 years and raise the debt ceiling by $1 trillion. It would also create a commission to identify more spending cuts to be made once the debt ceiling needs to be raised again in six months.”

While oil flipped flopped on light volume it is clear that the safe havens seem to be commodities. Not only is gold and the Swiss franc hitting record highs, but we are seeing a surge back into the Australian and Canadian dollar or the commodity currencies. (A move you may have caught if you were getting my daily trade levels.) Currencies that have rallied basically since Fed Chairman Ben Bernanke put quantitative easing back on the table but even more so as the markets realize that a US default or downgrade will be bullish for commodities. There will be exceptions and volatility. Oil might fall at first as it tries to assess the potential for demand destruction. Yet as judged by the moves in the Canadian and Australian dollars we know where money will flow. In the long run a debt default in the US would be eventually bullish for oil, very bullish. Now I'm repeating myself!

Yet as I have said before a default or a United States debt downgrade would almost guarantee a third round of quantitative easing, or as I like to call it QE 3D. The printing of more money after a default would add a very bullish dimension to the commodity markets. The Fed acting to calm the markets would flood the markets with freshly printed liquidity. That would counter rising interest rates with currency devaluation. You would see funds throw hot money at the emerging markets and demand for oil would surge in places like China, despite the sharply rising price in dollar terms.

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