If you have not heard, Saudi Aramco refineries apparently got hit by a drone attack and are now in flames. The US has come out and blamed Iran for this attack.
This should be bullish oil, I am looking for a break above the 58.75 zone. I am bearish on oil given the fundamentals and the fact that we are likely heading to a recession. However, anything geopolitical will keep oil buoyed.
To be honest oil needs to be kept up. A lot of western oil companies took out loans from banks during the recent fall in oil. If oil falls and these oil companies feel the pinch once again and cannot afford to pay their loans to the banks...the banks will also fall. Oil seems like it needs to be 'managed' above 40 or 50 to keep these companies from falling.
If you have read my work on the US Dollar, I have outlined why the Dollar going HIGHER will exacerbate the world problems. You can read that post linked below.
Russia and China are attacking Dollar demand. Right now the US has what the French called 'exorbitant privilege' meaning as long as the Dollar remains the reserve currency, there will always be artificial demand for it. Meaning the US can print as much dollars they want without having to care about their debt and deficits.
Once US Dollar demand takes a hit, the Chinese can sell off their treasuries and do some damage ( especially when interest rates are cut and moved lower). But they are targeting the Petro Dollar: the US Dollar being used for oil payments.
Iran is key for Russia and China. As the US Dollar gets stronger, nations such as South Korea, Japan, Turkey, India and some European nations have chosen to purchase oil from Iran because Iran accepts any currency besides the US Dollar for their oil. Japan, South Korea and some European nations have chosen to lessen or halt their imports due to US pressure. However Turkey and India told the US to mind their own business.
The Indian Rupee and the Turkish Lira have been decimated due to the US Dollar strength. These nations essentially cannot afford using the Dollar to buy Oil. Iran is convenient for them because they can use their own currency to purchase oil.
As the US Dollar gets stronger, more nations will want to ditch the petro dollar and purchase Iranian oil. On a side note, Russia and China have put a lot of money into Venezuela and backing Maduro...it is likely they have told him that when Venezuelan production comes back to par, Venezuela will NOT accept US Dollars for their oil. Whereas the US backed Guaido would essentially only accept US Dollars for Oil. We have seen this situation occur with Saddan Hussain in Iraq and Gaddafi in Libya where it was likely they were taken out due to the fact they were beginning to accept other currencies besides the Dollar.
The Russian and Chinese plan is simple. To get more nations to drop the US Dollar as the Dollar price goes up. In fact with their large Gold reserves, they may be telling dark pools to keep buying the dollar. Yes, there currency will fall against the US Dollar, but their gold priced against their currency increases so they avoid damage. This is how the Russian central bank pretty much fought off US Sanctions.
So as the Dollar gets stronger, more nations will elect to purchase oil from Iran. This means that Saudi Arabia begins to lose market share because their customers are going to Iran. This would force the Saudi's to drop the Dollar in order to entice customers...but there is another thing.
Putin has been getting close with Mohammed Bin Salman (MBS) who is expected to be the next King. We have all seen that Putin-MBS and Trump watching from behind high five meme.
It is likely that when MBS becomes King, he will drop the US Dollar with a guarantee that the Russian military will offer Saudi Arabia protection from any US responses.
Right now Saudi Arabia can influence American foreign policy greatly. I am sure they have told the US to deal with Iran otherwise they drop the Petro Dollar. They are in a very strong position.
For the Americans, I think they know that Iran is the key. They know they need to take Iran out. Of course Iran is no pushover. But the military will have to strike Iran in order to protect US Dollar demand. The US military is the armed branch of the Federal Reserve and the US will have to use the military to force every nations to accept and use the US Dollar and punish those that do not.
Party Started with a 10% GAP on Oil, Let's GOOOOO!~
Institutions and Private Funds are going to be forced to react, this WILL be the biggest week of trading this YEAR.
Uncharted-FX
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@MarketMakerTraders, It will definitely be an interesting week! Fed rate decision too and a few other central banks this week as well! Will be very interesting to see how Oil closes this week!
autosampler
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thanks for good informations and analysis..
Uncharted-FX
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@autosampler, Thanks for reading! Glad you enjoyed it!
Thanks for the write up. Enjoyed it. One thing I am not understanding. Why there is a talk of recession now? Job market is good, unemployment rate is at lowest point and still creating jobs, Stocks are all time high -- breaking records every week or so, interest rates are low, inflation is not that crazy.......still why r we talking about recession? I understand that it will come eventually but why the talk is now?
Uncharted-FX
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@tahmid29, Thanks for the comment!
Stock market does not reflect the real economy. Money has been flowing into the stock market because there is no where to go for yield since interest rates are being suppressed low by central banks. Many companies have done stock buy backs rather than investing in new assets because they know that central banks are stuck with QE. Also, a lot of the jobs that have been created have mostly been retail and restaurant. This has been the weakest recovery ever.
When it comes to the recession signs, when an economy is strong, you tend to increase rates. You cut rates when the economy is weak to spur it. So President Trump saying we are in the strongest economy ever while talking about lower rates is a bit funny. If you look at PMI data, it has all been weak. This tells us what is coming. Essentially producers are slowing down and not taking orders to make more goods due to a slowdown. A recession requires 2 consecutive quarters of contracting data so it is lagging. When it is announced, we have been in one for 6 months. It is likely we are already in a recession.
@tahmid29, the economy has been slowing due to trade war with China, and the fear is that we have so much debt that any significant slowdown will trigger a chain reaction of defaults and bankruptcies and credit rating downgrades. US private debt is now $2 trillion above the 2008 pre-recession level. The federal deficit is over 4% of GDP, again significantly higher than pre-recession levels.
Party Started with a 10% GAP on Oil, Let's GOOOOO!~
Institutions and Private Funds are going to be forced to react, this WILL be the biggest week of trading this YEAR.