The Problem with Assumption

HiResThis morning, I noticed an article by the ever-informative Michael Lynch of Forbes. Seriously, if you are interested in oil policy and are not reading his column, you are missing out.

He brought up the interplay between Fed policy and the affect that policy can and does have on the market for oil. In all honesty, this was something that I thought was common knowledge, but that’s what I get for thinking my own worldview is representative!

Mr. Lynch in his article today argues that, while a rate rise by the fed ordinarily signals real economic strength in U.S. markets, we should not expect this time to be the same. In short, he argues that the economy is in “good but not great” shape, which will not help the demand side for the oil economy.

What this will do, however, is strengthen the dollar. The reason for this is probably common sense. As the rates from the Fed rise, it signals both strength in the dollar itself, as well as increased yield for investors in monetary instruments. Those seeking safe yield will purchase more dollar-denominated securities, thus leading to price support for the currency itself.

How will this affect oil? Well, oil is, like many other commodities, a dollar denominated product itself. Even Brent crude (nominally a British product) is priced according to the dollar. A weak dollar means that it takes more investment to buy the same amount. A relatively strong dollar, meanwhile, places price pressure on dollar denominated commodities.

As with many other things, so long as all is normal, this pressure is minimal… a few pennies here or there. When we start talking about depression type pricing, however, it only greases the skid downwards. In short, as if oil needed any more assistance, it looks like the December rate talks could put even more downward pressure on the price of my beloved WTI for the end of the year.

Buckle your seatbelts, folks… we’re in for quite a ride.

This entry was posted in Economics, Oil & Gas, Oil Prices, Uncategorized and tagged , , , , , , . Bookmark the permalink.

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