Oil's Spike Starts in the Ground, Not in the Dollar

Here it is, stark as day, the misinformed view that is coloring this market: "Oil's rise during the last six months has been fueled largely by investors buying crude futures as a hedge against a weakening dollar."

This statement, from The Wall Street Journal, is the kind of conventional wisdom that has dogged the thinking in this market for months. It is as absurd as the notion that Ben Bernanke holds the key to the price of chicken wings, as if his rate increases or cuts determine the price of grain feed and therefore chickens.

Yet it has so much credence that it has become the boilerplate explanation for every time the dollar goes up or down.

First, investors who want hedges against the dollar buy other currencies, just like companies do. They go long the euro or the yen, or they buy gold, but they do not buy oil futures.

The buyers of oil futures are those who are frantically trying to lock in their costs and want to anticipate higher prices so they can get some control over their bottom line. You can read that in everything from a General Mills (GIS - commentary - Cramer's Take) quarter to a Continental (CAL - commentary - Cramer's Take) loss report.

The sellers? Well, here's the real issue. The sellers are the speculators, because they sure aren't the producers.

Go look at the numbers Exxon Mobil (XOM - commentary - Cramer's Take) gave us yesterday. Exxon should be the largest non-national repository of oil, and Exxon has not been a believer in higher oil prices. It fought them when they went to the $40s and then to the $80s, and at $110 they still believe the whole thing is unrealistic. They haven't found enough oil to make a difference, even as they are the one company that may have been able to be somewhat of a swing supplier. Their production is down here. Clearly if they believe that oil should be at $50, they would be pumping their darned fool heads off.

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