So when the dollar strengthened yesterday, investors took their oil profits off the table. As you can see, the price of oil has little to do with supply and demand and everything to do with the direction of the dollar. And today both oil and the dollar are down.
I believe the long-term weakness of the dollar will push oil prices up. Today it didn’t happen and it may not happen right away. Oil looks pricy, given slack demand in the energy sector. Unless there’s a run on the dollar, oil’s price should be range-bound with current prices defining the top of the range.
Why should you care? Well, the price of oil tells you how investors feel about the dollar. And that gives you important clues on how to invest. More after the excerpt below from The Gulf News…
London: Oil prices fell towards $86 a barrel yesterday, easing back from two-year highs reached earlier in the session, as a stronger dollar prompted profit-taking.
By 0928 GMT, US crude for December delivery shed 55 cents to $86.30 (Dh315.85) a barrel, having reached two-year highs of $87.49 a barrel. ICE Brent was 61 cents lower at $87.50 a barrel.
The stronger greenback — which typically trades in negative correlation with dollar-denominated commodities — also weighed on gold prices, pulling them lower from a fresh record of $1.398 an ounce earlier.
“It is a reasonable reaction given the US dollar continues to strengthen and it was very unlikely that [oil] could continue to decouple from the US dollar,” Commerzbank oil analyst Carsten Fritsch said.
“If the dollar continues to regain strength, this should weigh on oil prices and could lead to some profit-taking,” Fritsch said.
The dollar index, a measure of the greenback’s performance against a basket of currencies, rose 0.7 per cent to 76.950.
Commodities rallied last week after the US Federal Reserve unveiled a second round of monetary stimulus, while oil climbed after a stronger-than-expected jobs report on Friday.
The higher the price of oil, the more attractive are the big global companies with big markets overseas. Because high oil prices mean that their products are priced lower in foreign markets.