WTI crude is steadily going from strength to strength. On Monday, the front-month May contract was trading at $52.74 per barrel. That follows Friday’s expiry of the April contract at $51.06 per barrel.
Meanwhile the US dollar continues to weaken.
All of which leads us to reprise this chart from Bank of New York Mellon issued earlier last month.
So could it be that dollar weakness — or rather the expectation of further dollar weakness – is driving this renewed uplift in oil and other commodity prices more so than anything else? That’s not to say other supply and demand fundamentals like Opec cuts, Chinese buying etc are not contributing, but in the current circumstances, is it not oil’s and other commodities’ linkage to the dollar that will most likely direct their future price path? It is undeniable that by its very nature oil is an inflation hedge, after all. The analysts have at least jumped on the idea this week. As JBC Energy states on Monday morning:
… with Opec cuts being felt in the market and inflationary concerns driving financial investors into oil futures once again, prices managed to gain some 10% week-on-week. Meanwhile, products showed gains across the board on Friday, with RBOB increasing by 1.4%, Nymex Heating Oil moving up by 2% and ICE Gas Oil rising by 1.9%.
And Dennis Gartman of the Gartman letter puts it as follows:
The weak dollar is of course at the base of this strength, and until it is clear that the US dollar is going to strengthen, we have to believe that the commodity markets are strong and shall remain so for some while yet.
Stephen Schork of the Schork report, meanwhile, wonders just how credible the inflation hedge trade really is:
What are the reasons for buying oil… inflation hedge? That is picking up a lot airplay of late. However, in a (still) deflationary global economy that is a stretch. What’s more, nothing we heard last week in Vienna, be it from OPEC’s official rhetoric from its meeting on March 15th, nor from our numerous private conversations with the Group, nor from the impressive array of non-OPEC affiliated speakers at the Group’s 4th International Seminar… nothing we heard, nothing anyone heard for that matter, could reasonably be construed as bullish. Be that as it may, the market appears to want to go higher. After all, why listen to OPEC when the guys on Fast Money are telling us to buy oil?Of course, the key point is: if there is nothing out there that can be reasonably be construed as bullish, inflation hedging must be the most logical driving force for higher prices.