As we and others have noted, watching oil and gas prices has become an industry hobby.  So too has the effort to immediately link cause and effect.  As in, "Oil was up today.  Were rig counts down?  Were production numbers announced?"

Of course, in reality we know short-term fluctuations often have few direct causal factors while, on the other hand, long-term price variations can be attributed to a number of factors including, but not limited to:

  • Production, domestically and internationally
  • Anticipated demand, which itself can be influenced by:
    • Weather
    • Domestic and international economic data
    • Expected demand for goods and services
  • Geo-political issues, particularly in volatile areas in Africa, Latin America and the Middle East

One factor that fits somewhere in the list but is often overlooked is the role of the U.S. dollar.  One doesn't have to look too hard to see indications of the role of the dollar; an early headline on MSN Money this morning read "Oil rebounds towards $57 as weaker dollar overshadows China slowdown."

In simple terms, as the article cited above states, "dollar-priced commodities ... tend to move inversely to the U.S. currency."  Even for a non-economist, this seems rather straight-forward – the stronger the dollar, the less number of dollars are needed to buy each barrel of oil.  In fact, as reported in the Oil & Gas Journal, a recent study found "that a strong negative correlation has existed between spot crude prices and the dollar exchange rate since the early 2000s, 'while there was no such systematic correlation over the previous three decades.'" In fact, it has been reported that "[t]he correlation between the U.S. dollar and oil prices has risen since November."

As one would expect, not everyone agrees.  A Business Insider article from last fall, argued that the shale revolution in the U.S. reduced that correlation between the dollar and oil prices. In fact, the article quoted Goldman Sachs's Jeffrey Currie as saying the correlation is reduced because "net imports are over 60% lower than in 2008."

To further confuse the issue, the study cited in the Oil & Gas Journal article noted some peculiarities with oil pricing:  "Oil prices generally do not respond to US macroeconomic news, while other asset prices do.  Yet oil immediately reflects changes in other financial assets, indicating that oil truly is a global commodity whose price is driven by US-specific factors just as much as by global economic and financial factors that are captured by various asset prices."

One additional factor not discussed previously.  Some are speculating that constrained storage, which are reportedly at record levels after 10 straight weeks of increases, could send prices even lower.

On the other hand, maybe it is just supply and demand.  (That certainly would be easier).

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