Volatility continues to be the word on everyone’s minds, and the term used in seemingly every petroleum news posting. Between the instability of China’s economy, turmoil between Iran and Saudi Arabia, job reports in the U.S. and Canada, and U.S. crude stockpiles, which are 100 million barrels above the five-year average, the market’s direction is more-than-ever “up in the air.” Currently, crude is trading down $1.55 at $31.61, lower than the 2004 record of $32.40. Heat is also down $0.0336 and RBOB is down $0.0159.
The relationship between commodities and the value of the dollar is quite interesting, and also quite easy to understand. Commodities, such as oil, follow an inverse relationship with the value of the dollar: when one goes up the other goes down, and vice versa. This is largely due to two main factors. First, commodities are priced in dollars. Therefore, when the dollar goes down, it will take more dollars to buy that commodity. The other factor is that commodities are traded globally, so the value of the dollar shifts foreign buyers’ potential purchasing power. For example, if the value of the dollar decreases, foreign buyers will now have greater buying potential, which could in turn increase demand. What we know about basic economics is that an increase in demand typically triggers an increase in price.
Why am I explaining all of this?
Well, we are currently undergoing a rapid appreciation of the U.S. dollar, and key analysts believe that if currency gains 5 percent, oil may fall between 10 to 25 percent. According to Morgan Stanley analysts, “A global glut may have pushed oil prices under $60 a barrel, but the difference between $35 and $55 is primarily the U.S. dollar."