Tuesday, June 16, 2009

Why Markets Fell - Demand / Supply

Sometimes we try to be too smart. Editors on business desks are mostly "idiots", they will never accept a reporter's submission that the markets fell because there were more sellers than buyers. The idiot box on TV will also not accept such commentary, their producers will bark to journalists to "go find me a reason to tell the audience". So, when you go looking for reasons to explain a naturally occurring phenom, the reasons will tend to be false. If you must get me to give an answer, I will say the answer to everything is GRAVITY.

If you throw something up, eventually it has to fall. Gravity brings all things back down to earth. Let's look at the supposed reasons for the market weakness:

Oil futures finished with losses on Monday, as U.S. dollar strength and concern over ample global crude supplies offset any potential support from the post-election turmoil in Iran. Natural-gas futures, however, rallied more than 8% to end at $4.182 per million British thermal units. Crude oil for July delivery ended down $1.42 at $70.62 a barrel on the New York Mercantile Exchange.

In the currency markets Monday, the dollar rose against the euro and most other major currencies, as weak U.S. economic data and rekindled worries over the European banking system boosted the greenback's appeal as a safe haven. The dollar was also boosted by comments from Alexei Kudrin, Russia's finance minister, who said that there was no near-term alternative to the U.S. dollar as the world's leading reserve currency.

Dollar strength typically weighs on dollar-denominated commodities such as oil, because it makes them more expensive for holders of other currencies. Commodity prices were weaker across the board, with gold futures falling to their lowest level in more than three weeks.

Stocks of oil are high all around the world, which suggests that on a supply/demand basis, oil prices should fall. However, crude prices are supported because investors are using oil as a hedge against the dollar and inflation.

Post-election turmoil in Iran has increased the geopolitical risk from the region, said Nimit Khamar. However, the current protests against the re-election of Mahmoud Ahmadinejad are unlikely to affect crude supply in the immediate term. The supreme leader of Iran has ordered an investigation of allegations of vote fraud in the nation's presidential election. Ayatollah Ali Khamenei ordered the investigation of fraud claims by the opposition leader, Mir Hossein Mousavi. Mousavi's backers launched street protests over the weekend after incumbent Mahmoud Ahmadinejad was declared the winner of Friday's election. If it holds, Ahmadinejad's victory, widely viewed as fraudulent, could create instability in Iran. While markets are not focused on Iran, Ahmadinejad's win will keep in place a factor that can drive further momentum in oil markets. If the turmoil over the Iranian election happened a year ago, oil prices would be soaring. But "maybe it's the news about the Khurais oil field coming on line" that's kept oil prices from climbing, he said. Saudi Arabia started production at the Khurais oil field in the eastern part of that country last week. That should add to spare production capacity, which is already up 3 million barrels from last year.

p/s photos: Fala Chen & Kate Tsui

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