Dollar Up, Oil Down

It’s the trade we’ve been watching for a while. At the beginning of this month, the dollar looked far too hated for its downtrend to continue. The dying dollar was largely responsible for the commodities boom on an elementary level, and elementary analysis was all we needed to think oil stood a good chance of moving lower.

The strong jobs report on Dec. 4 is what cracked the dollar’s descent. Even though the dollar extended that up move only modestly last week, it has so far this month bounced up from 15-month lows. That, in turn, sent oil down some $8 per barrel. Last week was particularly good for those short oil. We hold a half-sized position hedge against an oil price decline, and the hedge surged 13.5% last week.

Some point to factors other than the rising dollar for oil’s price decline, but other factors were fairly positive for the oil market, or benign. For instance, while Barclays noted that US consumption of petroleum products is off 20% from a year ago, China’s rebounding economy countered that news with factory output rising 19.2% in November. That alone caused the International Energy Agency (IEA) to raise its estimate of per-day oil consumption in 2010 by 130,000 barrels to 86.3 million.

Worries about disappearing stimulus support killing demand are valid, and act as nice back-ups in case the stronger dollar case for falling oil prices doesn’t hold. If the liquidity-driven phase of the market is petering out by any measure, weaker oil prices should follow.

Watch that dollar, though. Here’s its three-month chart, with the jobs report bounce flagged:

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