New York (Platts)--9Mar2009

A toxic combination of floundering equity markets and a resurgent US
dollar, proxies for ailing global economies, have kept global crude futures
rangebound for three and a half months now.

Since mid-November, just when global crude futures markets were settling
into what would become a well-worn $18/barrel range of $32/b-$50/b, the Dow
Jones Industrial Average has declined 2,240.9 points to settle March 4 at
6,594.4.

While the slide in US, and for that matter global, equity markets was
already under way, as the fallout from the mortgage meltdown and the knock-on
effect to credit markets played out, the US dollar did not start its comeback
until December 18. From that date, the US Dollar Index on ICE has soared
1,193.6 points, rallying to just shy of a three-year high of 89.625 March 4.

The dollar's revival has come in fits and starts, with the greenback
having actually carved out a bottom back in March 2008 at 70.698, an all-time
low, four months before both the light, sweet crude and Brent futures
contracts peaked at all-time highs of $147.27/b and $147.50/b, respectively.

As dollar weakness was credited for last year's run-up in commodity
prices, so too was the greenback's resurgence capping the ability of oil
prices to stage any significant rally at the start of 2009. And the dollar's
comeback has occurred despite a trillion-dollar budget deficit in the US and a
teetering bank sector, but in line with a narrowing of the trade gap and
interest rate differentials that at one time favored higher-yielding
currencies.

Inter-bank overnight lending rates remain near zero in the US and are
expected to for an extended period based on comments from Federal Reserve Bank
Chairman Ben Bernanke, while the Bank of England reduced its target rate last
week by 50 basis points to 0.5% and the European Central Bank lowered rates by
the same amount, bringing its benchmark lending rate to 2.75%.

The dollar/commodity relationship can be seen in seven-year cycles over
the past 24 years.

The US Dollar Index peaked in February 1985 at 164.72 and subsequently
went into a free-fall until bottoming at 78.19 September 1992, when the
now-famous phrase, "A strong dollar is in the US' interest," became a mantra
under the Clinton administration. During the same time period, the front-month
crude contract on NYMEX fell to $21.71/b from $26.73/b, but in between soared
to $40/b.

While the dollar rallied from 1992 until the start of this decade, crude
prices were for the most part rangebound.

The second and even more discernible seven-year cycle was from July 2001
through March 2008 when the US Dollar Index went into a free-fall, dropping to
an all-time low of 70.698 from 121.02, the highest level since 1985. During
the same time period, the front-month crude contract on NYMEX surged to
$101.58/b from $26.35/b.

Subsequently, crude prices dropped to $32.48/b December 19, 2008, from
$147.27/b, a depreciation of 78% in just five months. From March 2008 through
mid-December, the greenback would appreciate 24.74%. The correlation is never
one-to-one given that the crude market is less liquid than the foreign
exchange market, and the crude is a futures market compared to cash.

The relationship between crude futures and equities is more spurious,
given that stock valuations can too often be affected by high oil prices,
which can impact the bottom line of businesses. If anything, the two markets
move inverse to one another, not in tandem, as has been the case since
September 2008, a knee-jerk reaction to slowing economies causing petroleum
demand deterioration.

But tightening supply/demand fundamentals in oil should have already put
a floor in prices--the flip side being that renewed strength in the dollar
should serve to cap rallies in the months ahead.

--Linda Rafield, linda_rafield@platts.com