Morning Petrospective – June 6, 2011

he monthly May unemployment report showed an increase of just 54,000 non-farm jobs, which was less than a third of original expectations. The DJIA was hit and had the worst week since 2004. It was a fifth straight week of declines in equities and has been the worst five-week period since 2002. At its close, the DJIA was down 97.29 to 12,151.26. Oil prices were curiously mostly higher, though, as traders focused on the weak dollar as the euro added 145 points on the day. Crude oil prices were lower and products just slightly higher, but they did finish in positive territory.

The dollar hit a three-week low against the euro as Greece successfully restructured its debt. A number of other commodities rallied because of the weak dollar, but the group is lower as we start June than it was ending April. The question here is whether the dollar can hold its April lows or if it will just keep on going. If the dollar stabilizes, we have to expect weak economic numbers to catch up with oil and commodities prices.

One has to wonder if the Fed will end QE2 on schedule without replacing it with another round of quantitative easing or some other program. The economic data has certainly been weak enough lately for us to see that there are reasons to expect the Fed to act. Politically, it may seem unlikely, and there does seem to be a large group that is vociferous in its opposition to additional tinkering by the Fed. We know that these policies cause inflation and there is little evidence that they contribute much to lasting growth. If that argument wins out, we would see QE2 die without being replaced.

Ultimately, that would seem likely to shore up the dollar and hurt commodities. If one throws in economic weakness or softness, the reasons for lower commodities prices increase. Right now, the weak dollar is obscuring or shielding commodities prices from the bearish effects of a soft economy. If the Fed is quiet, though, one has to expect the euro and commodities to ease from existing levels. This coming week may be more about this.

European Central Bank head Claude Trichet will be delivering a speech this week, and the experts say we need to listen for the phrase “strong vigilance” in regard to inflation. Apparently, that would be his way of signaling another interest rate hike in July, which would act as a bullish factor for the euro – and bearish for the dollar. As a result, it would be bullish for commodities prices.

We also have an Opec meeting on Wednesday, with Iran acting as cartel president. The debate is whether Opec will increase its official quotas to reflect what is being pumped now, or if they will continue to use their old, rather dated guidelines as “targets” that no one really shoots for. In terms of output, it does not really matter. But, psychologically it could make a difference. In some respects, we could see a showdown between Saudi Arabia and Iran at the meeting. Iran does not want to sanction higher Saudi output levels, so it would be against raising quotas. The Saudis want the additional production included in their official quotas.

Friday’s employment numbers should have pushed oil quotes down $2.00 or $3.00 instead of 18 cents. Refined products never should have been higher at all. They were because of the weakness in the US dollar against the euro. And, according to those handicapping Trichet’s speech, there are reasons to suspect that a resolution of the Greek problem and an interest rate hike will hit the dollar (boost the euro) hard this week.

FMX Newswire

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Bentek Energy

• Rockies Observer – Rockies Production Closes with 2010 During Maintenance Season.
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• Power Burn Analytic Report – Power Burn Down 1.3 Bcf/d Over the Weekend.

Platts

• Petronas sees earliest FID on $20 bil refinery complex late 2012. Platts report from AOGC, Kuala Lumpur. 
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Bloomberg

• OPEC Upstaged by Qaddafi in Most-Hostile Meeting Since Gulf War.
• Oil Falls for a Second Day on Signs Slowing U.S. Economy May Crimp Demand.
• Yemenis Cheer Flight of Wounded President Saleh to Saudi Arabian Hospital.
• Natural-Gas Use May Increase 50 Percent by 2035 in ‘Golden Age,’ IEA Says.

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