A Crossroads for Oil and the Dollar

07/10/2007 12:00 am EST

Focus:

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says the dollar looks ready to break down while oil seems poised to break out of its trading range, as Monday's big price move may indicate.

We are approaching an important crossroad with the dollar, and the best investments in 2008 will reflect a sizable drop in the value of the dollar from present levels.

Note the lows [in the US dollar index] just over 80.00. They are important, and I believe they will be decisively broken by the end of next year. From a long-term standpoint, once the dollar breaks 80.00, we will be in an entirely new investment paradigm.

The bearish dollar fundamentals are apparent. China has officially announced that they are going to significantly reduce their foreign reserves and are going to invest the difference-some hundreds of billions, as well as excesses they receive in future years. This is a major move away from US dollars. Syria, Egypt, and Ecuador are also shunning dollars.

Venezuela, Iran, Kuwait, and Russia are now demanding euros rather than dollars for oil. Remember, Kuwait is a friendly country. Their decision is not political; it is economic. The Saudis are leaning toward euros as well. Who can blame them? It is foolish to accept an out-of-control, flat currency for finite precious resources.

The fundamental handwriting is on the wall. My advice is to take heed.

I [also] firmly believe that crude oil will reach $100 a barrel. "When" is always the next question, and it's the most difficult to answer. All it will take is a surprise flare-up in the Middle East, and crude will be $100 before you can read what happened. However, let's discount something so drastic (although far from unlikely) and look at crude from a purely technical viewpoint.

The September futures contract for light sweet crude has been consolidating between $64.00 and $69.50 for several months, but once crude breaks convincingly through $69.50, the next near-term objective is $76.00. (It topped that level during Monday's trading-Editor.)

Believe me, $76.00 is going to attract attention from the media, and it will excite the market. I cannot see any credible negatives in the fundamentals. The fact remains that most of the important oil fields in the world are drying up, and production is falling off. Experts are looking for production (which was over 2.0 million barrels per day last year) to be as low as 0.5 million next summer. That is a big drop.

I believe the Saudis are lying about their production, as well as their capacity to increase production. They are scrambling all of their resources just to keep up. Their day of reckoning is coming soon, and that is why they are getting tired of accepting depreciating dollars.

Bottom line, the US Dollar Index looks vulnerable; and once it breaks below 80.00 and the fireworks start, it will be too late to take advantage of the chaos. Concentrate your investment strategy on a weak dollar, and you will do just fine over the next 18 months.

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