Oil reached a 29-month high (yesterday) Monday morning in London and gold hit an intraday record as investors sought to hedge against inflation and traders bet billions shorting the dollar.
Brent crude futures contracts in London gained 0.1% yesterday to close at $116.11 a barrel, pushed higher by the Middle East crisis disrupting the oil supply. Crude for April delivery was up 0.9% to $105.36 in Monday afternoon trading on the New York Mercantile Exchange (NYMEX).
Fighting in Libya so far has reduced the country's oil output by 1 million barrels per day.
Libya's oil outflows will continue to decline as major U.S. oil companies have stopped trading with the country due to U.S. sanctions. Exxon Mobil Corp. (NYSE: XOM) and Morgan Stanley (NYSE: MS) announced they had stopped trades with Libya, and ConocoPhillips (NYSE: COP) said it was no longer exporting oil from the country.
Besides supply constraints, speculators have proved to be another driving force behind surging oil prices.
Speculators bet that oil will continue to power into the triple digits and have poured billions into oil futures. Investors last week bought 50,200 more contracts in West Texas Intermediate (WTI) crude. That brought the total number of futures contracts to 268,622, representing nearly 269 million barrels.
That's six times as much oil as can be stored at the WTI trading hub, according to Stephen Schork of the energy markets newsletter The Schork Report.
"It does not get any clearer which way Wall Street is trying to take oil," Schork wrote.
Analysts from Commerzbank AG (ETR: CBK) forecast Monday that WTI crude will average $107 in the second quarter, pushing gasoline prices closer to $4.00 a gallon. The national average for regular gasoline hit $3.38 a gallon on Feb. 28, up from $2.70 a year prior, according to the U.S. Energy Information Administration.
To protect the U.S. economic recovery, the Obama administration may tap U.S. oil reserves to combat rising crude prices. The 727-million-barrel emergency reserves are rarely tapped and have only been used twice in the past 20 years.
Consumer fears over high oil and gasoline prices pushed investors toward gold, which started the week hitting a record spot price of $1,444.40 an ounce. Silver also hit a 31-year high of $36.70 an ounce. Investors have turned to the precious metals as a hedge against inflation, their interest boosting prices even higher.
"The geopolitical risk premium is clearly reflected in the gold price," Robin Bhar, an analyst at Credit Agricole SA (EPA: ACA) told Reuters. "The violence (has) intensified, which does prompt suggestions of civil war in Libya."
Commodities were up overall as cotton led the sector higher, rising a daily limit of seven cents, or 3.3%, to hit a record $2.197 a pound.
Speculators driving up commodities prices could put the brakes on a U.S. economic recovery for the rest of 2011.
"Our analysis shows the maximum impact of oil on growth occurring with a lag of 3-4 quarters, which would point to a peak impact in late 2011," Goldman Sachs Group Inc. (NYSE: GS) analyst Jan Hatzius wrote in a note to clients last week.
Driving Down the Dollar
Speculators hit the currency markets and have thrown down record amounts of money against the U.S. dollar by short selling the currency.
"We may be seeing a turn in the longer-term outlook for the dollar – for the worse," Kit Juckes, head of foreign exchange strategy at Société Générale, told The Financial Times.
The U.S. Federal Reserve's easy money policies and the more than $14 trillion in U.S. debt have helped lead investors away from the dollar. Short dollar positions climbed to 281,088 contracts the week of March 1 from 200,564 the week ending Feb. 22, according to figures from the Chicago Mercantile Exchange (CME).
That puts the value of bets against the dollar on the CME to a record high of $39 billion, up 30% from the week prior.
The dollar index, with compares the dollar to a basket of six other currencies, fell to a four-month low Monday, down 0.2% to 76.215.
Investors are also more optimistic on the euro's prospects versus the dollar than they were months ago. The currency last week rose to a four-month high against the dollar of $1.3997, up nearly 9% from January.
"Dollar bears have become a marauding horde," David Watt, an analyst with RBC Capital Markets, told The FT.
Speculators favoring the euro over the dollar raised euro bets on the CME to $8.8 billion in the week ending March 1, the largest value since January 2008.
Investors expect the European Central Bank (ECB) to tighten its monetary policy and raise interest rates to curb rising inflation. ECB President Jean-Claude Trichet hinted last week that the bank could raise rates at its April meeting.
"Interest rates are set to remain a solid support for the euro against the dollar this year. We see the euro at $1.50 towards the end of the year," Jane Foley at Rabobank Group told The FT.
The euro betting marks a stark reversal from last year, when investors worried that the European sovereign debt crisis would cause a euro collapse.
News and Related Story Links:
- Money Morning:
This Middle East Meltdown Will Send Oil to $300 a Barrel – and Pump Prices to $9.57 a Gallon
Speculators double down on oil
U.S. may consider tapping strategic oil reserve
- The Financial Times:
Traders ‘short' dollar as currency loses attraction
- The Financial Times:
Traders build up record bets against the dollar