Thursday, June 12, 2008

The International Energy Agency...IEA

If you are like me you were unaware that there actually is an International Energy Agency, but there is. The IEA acts as a energy policy advisor to the 27 member countries in an effort to ensure reliable, affordable and clean energy for their citizens. It was founded in the 70's during the last oil crisis. I have been really keying in on crude lately as I feel that this is the big driver of the markets today. High crude prices is a major factor in the weak dollar and one of the many worries on the Fed's mind, but more on that later.

The members of this agency are required, when a crisis hits, to take steps to deal with the situation withing 90 days. During the disruption caused by hurricane Katrina the member countries all member countries released 60 million barrels of oil onto the market within 30 days to help stabilize the situation. The member countries are required to keep a 90 day supply of crude on hand to deal with these situations.

The world faces an ``oil crisis,'' and the International Energy Agency stands ready to release emergency stockpiles even as the biggest consumers discuss measures to contain spiraling demand, the agency's chief said.

``We can call it an `oil crisis' given the current price, and that it continues to climb even after global efforts to cut consumption,'' Tanaka said. ``We see a critical, structural issue in the global oil market, where supply growth isn't catching up with demand.''

Unlike the crisis in the 70's which was a supply side situation, this is a demand side crisis. This is what has me concerned. Sure we can cut demand due to a slowing economy, or taking away subsidies (in Asia these are quite common) but will the demand go away or just go to sleep for a while ? During the 70's the government installed a 55 mph speed limit. Talk of that happening again was running through the market today. This would help as it would definitely reduce demand in a permanent way. But I think the key is increased production and alternative energy sources. Without these two methods I think we see $160 per barrel by the end of the summer.
Also today margin requirements were raised on crude contract on the exchange. I think this helped spike the market as all the under water shorts had to cut their position or post more margin. I think this is a good move by the exchange as it could help get some of the speculators out of the market.

Weekly Desk Meeting.

Today we had out desk meeting, and talk was of the Fed/Treasury and their unhappiness of the weak dollar (also alot of time spent on crude as discussed above). One person said that in discussions with people at the Fed there was a "line drawn in the sand" for the dollar. They clearly did not want it making new lows and would even consider raising rates to defend it. Please take this with a grain of salt, as this person said that intervention was not on the table. I find it very hard to believe that the Fed would raise rates to defend the dollar with all that is going on in the market. What good would 25-50bp do?? If anything this says to me that the dollar will go and test the low and if we get within spiting distance the market will take it out. In my opinion intervention would be a much more viable tool to stop the dollar fall then raising rates. Then again a strong economy with low inflation would be alot better.

On the rates front the view was for higher rates globally (Chile raised rates last night 50bp) and this should keep the Latam currencies on the strong side.

Good Luck and Good Currency Trading



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