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Oil Prices: Understand Their Movement…

Posted by rantaboutit on January 4, 2007

Oil prices are sliding. It stands around 56$ per barrel. There are rumors it might fall below 50$ too if there are OPEC production cuts and declining crude supplies.

So why did oil prices fall ?

  • Stable geopolitical scene.
  • Slowing economic growth in the United States.
  • Higher-than-normal temperatures that generated less demand for heating oil.
  • Big drop in crude supplies (the drop was considered temporary due to thich fog around the ports)

However energy experts suspect the slide is over, otherwise OPEC will be nervous. One will not see any rally in prices unless the demand for oil picks up. Next few weeks are going to be really interesting for oil prices.

1. So which way does the dollar stride when the oil prices fall ?
Up up up…
Reason: Thats very simple, the cheaper the oil to import, less dollars go out. Using the simple demand/supply equation, the dollar becomes more valuable.

Rule of thumb: Oil down = Dollar up

2. When the dollar goes up what happens to Gold/Silver stocks ?
Down down down…
Reason: When the currency becomes weaker, people buy more gold/silver. They believe gold/silver metal will generate more value than the currency (USD). Weaker dollar is also an indication of weak economy and bearish market. What is the best thing to invest in weak economy ?? Its always metal. Stronger dollar is an indication of strong economy and bullish market. This where people want to sell off metal and buy back strong dollars since it has more value. This is why gold prices jump up and down depending on dollar strength.

Rule of thumb: Dollar up = Gold/Silver down

3. When the dollar goes up what happens to Tech/Telecom/Semiconductor/Consumer stocks ?
Up up up…
Reason: Like i said before, when dollar is up, economy is doing good. Oil prices are low. There is more job growth, individuals spend less money on oil to buy more of consumer goods.

Rule of thumb: Dollar up = Tech stocks up.

Conclusion: Keep a close eye on oil prices. The stock prices will move accordingly.

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