Commodities fight weak fundamentals/strong dollar

By Phil Flynn

The Dominate Dollar

While the fundamentals for petroleum oil are very weak there is more to the markets’ recent weakness. You can’t ignore the impact of the soaring dollar. Commodities across the board are finding it harder to try to establish support as currencies in Europe continue to get crushed. Not only has the euro, which has been hit by the ECB's quantitative easing but the British pound Sterling that has been rattled with the possibility of Scottish independence. Even with the positive news from an oil demand standpoint that the EU will delay sanctions on Russia as they try to determine that a cease-fire might hold failed to overcome the strength in the dollar.

Brent crude hit the lowest level since May of 2013 as demand prospects continue to look bad. Libya is even calling on Saudi Arabia to cut production as their oil comes onto the market adding to a growing glut. U.S. gasoline demand on the four-week moving average was the worst since the early part of the decade signaling that perhaps the bad jobs report was not a fluke. Scottish independence also makes the outlook for oil murkier. An independent Scotland would have to find a way to support itself and they would have to find a way to develop their energy resources. The oil demand numbers are sending warning signs that the global economy is slowing. The deflationary problems in Europe seem to be spreading. At this point it is not clear whether the ECB has done enough to stimulate the economy but if oil demand is any indicator there may be more headwinds for the economy.

This of course will make the Federal Reserve’s job more difficult as a weak jobs number and weak oil demand is signaling that we may see the economy starting to contract a bit.  Yet we are still the best house in a bad neighborhood and the dollar is adding to deflationary numbers on the commodity front. Commodities are getting crushed from sugar to coffee to gold to grains. The dollar is the major force not to mention sinking demand expectations around the world.

Natural gas snapped back(NYMEX:NGX4) as warm temperatures that last two weeks and cooler temps ahead could slow the injection march. We also have a reminder that we are still in Hurricane season. The National hurricane center is reporting that a broad area of low pressure located a few hundred miles south of the Cape Verde Islands continues to produce disorganized showers and thunderstorms.  Environmental conditions are forecast to be conducive for gradual development of this disturbance during the next several days while it moves west-northwestward at about 15 mph.  The MHC says the storms formation chance through 48 hours is at a medium 30% and the formation chance through five days at a 60% chance.

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