The Biggest Threat To Oil Prices Is The Dollar, Not A Supply Glut

The glut of gasoline and other refined products has taken center stage for the oil markets, threatening to initiate a new bear market and push oil prices down below $40 per barrel for the first time in months. But while a surplus of refined products is weighing on crude prices, there could be another culprit that does not get as much publicity.

Goldman Sachs says that a strong dollar deserves more blame for an oil price downturn, and further strengthening of the greenback looms as a much larger threat to prices than the gasoline glut. The U.S. Federal Reserve could raise interest rates and the effect of that, combined with lingering global financial uncertainty, could push oil prices below $40 per barrel. Goldman says that while there is indeed a glut of gasoline, it won’t be responsible for further declines in oil prices because it is a supply-side and not a demand-side problem.

“We are currently going through the typical later stages of an oil bear market, when strengthening crude fundamentals run into weakening product fundamentals,” Goldman wrote in a July 27 report. “Uncertainties on the near-term path of the oil market re-balancing have left the U.S. dollar as the primary driver to lower crude oil prices recently.” In other words, the fluctuation of the dollar could have a larger impact on oil prices than the fundamentals of oil supply and demand.

Global production seems to still be declining. But, I can’t find current data on global demand. Maybe, it’s declining more?

I wonder if all these terror attacks has dampened the number of people traveling?

This has been a STEEP decline in oil prices in the past month. Hard for me to believe it will really continue. But, it’s a falling knife right now.

It is silly, IMO, to try to reduce a multiple-input equation to a one dimensional paradigm.

The dollar is unquestionably a big piece of the puzzle and I would agree, the biggest.

Global sluggishness and mild oversupply are others.

We have this condition now where the rest of the world is turning to neg interest rates. That means, foreign governments of every description have a risk-free reliquification trade, buying US Tsy bonds. At **ANY** yield.

I find it very synthetic. It masks actual economic conditions, and even though it drives apparent rates lower the ones who really benefit are the very wealthy, the ultra-creditworthy. This is the class who has benefitted most under 0bama and under QE. Not meant as a dig. So has the stock market.

But before this construct implodes, the stock market could be driven a lot higher. A LOT.

More economic confusion. A strong dollar is a good thing, not a bad thing. Monkeying around with standard currency values is like changing the measure on you bathroom scales. You can change the measurement of your bathroom scales to more ounces per pound and thus think you’ve lost weight when the scales says you have fewer pounds. But your weight is the same, you’ve just fooled yourself into thinking you’ve lost weight by changing the weight measurement.

Same with the value of currency. It is simply a standard measurement used to determine the value of the currency, like the weight measurement on you bathroom scales. It MEASURES your weight, but it doesn’t DETERMINE your weight. Your bathroom scales don’t determine how heavy you are, it only communicates to you how heavy you are. When you change the scale measurement, you only fool yourself.

The market economy NEEDS to rely on a dependable, fixed measurement of the value of the dollar, like the gold standard, to know that prices are reliable because prices are the method of communication in the marketplace. Changing currency and dollar values willy-nilly throws the market into chaos and makes people much more wary of investing since they don’t know how true the prices really are.

You want a strong dollar that has a fixed standard of value, like the gold standard. It helps the marketplace trust the prices they’re seeing and thus helps encourage investment.

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