Oil slid over $50 yesterday for the first time in 7 months thanks to supply disruptions, although anticipated government action seems to be the reason why we are trading down this morning. As of 9:33 a.m., heating oil is down $0.0155 and RBOB is down $0.0087.
Federal Reserve Chair Janet Yellen will have her chance to hint at whether there will be upward movement in interest rates or not.
For those of you who may not fully understand the economic correlation between interest rates and oil prices, here is a brief explanation: Increasing interest rates can raise the operating cost for producers and the overall cost for consumers, which in turn can reduce the amount of time and money that people spend on driving. If it is unprofitable to produce, there will be less production. With less production and fewer people on the road, it is likely that demand for oil will go down, forcing oil prices to fall.
It is also important to note that higher interest rates often help increase the value of a nations currency. When foreign investors realize the potential for earning higher interest rates elsewhere, they are more likely to invest in that particular currency.
Case for a weaker market to come:
Coupling the return of normal Canadian crude production levels with OPEC’S increasing production sure could lead one to believe that the bears will start to creep out of their caves. According to UBS analyst Giovanni Staunovo, “The return of disrupted supply and OPEC's increasing of production lay the foundation for a wider market surplus, and for prices to fall back below $40 in the short run.”
Case for a stronger market to come:
Overseas influence: Attacks on Nigerian pipelines and oil supply contributed to cutting global production by 4 million barrels per day.
United States influence: Since oil reached lows that have not been reached in over a decade, many drillers were forced to downsize due to weakened demand. Now that prices are allowing drillers to break even or turn a small profit, they are scrambling to get their ducks in a row. When over 100,000 oil and gas employees are let go, it is no secret that it will take some time to get operations back to normal.
As of 12:37 pm Heating oil and RBOB are trading close to flat.
For now, all we can do is huddle around our TVs and radios, waiting for further direction from the Federal Reserve.