Oil Prices: Is There Another Reason For The Surge?
The past month has been a roller coaster ride for oil prices.
Political unrest in North Africa has investors sitting on the edge of their seats. First it was Egypt and the overthrow of Hosni Mubarak. It was just under a month ago that protests and uncertainty in the country sent oil prices skyward.
Now it’s Libya putting world energy markets in a panic…
As in other North African countries, Libyan protestors are demanding the ouster of their corrupt dictator. In Libya’s case, it’s Moammar Qaddafi. Rebels want an end to decades of oppression by their violent leader… and they’re willing to die for it.
But Qadaffi isn’t going down without a fight.
According to multiple reports, the evil madman is brutally gunning down thousands of his own citizens to stay in power. Nonetheless, rebels are taking control of cities all across Libya.
No one’s sure how it’s all going to play out… the chaotic situation is unfolding before our very eyes.
One thing’s for certain, it’s wreaking havoc on the oil market.
Many oil companies across Libya are shut in…
According to the International Energy Agency (IEA), oil ouput has dropped over 850,000 barrels a day in the quickly fraying country. In normal times, Libya produces over 1.6 million barrels per day, so the slowdown has the oil market surging.
European countries rely heavily on Libyan oil…
The European oil contract, Brent North Sea is bubbling over on the Libyan worries. At one point, the price exploded to nearly $120 a barrel… the highest since 2008. West Texas Intermediate (WTI), the American oil contract, broke the $100 threshold for the first time since 2008.
Clearly, the oil market doesn’t like the political unrest and the uncertainty it brings.
Hopefully, Qaddafi steps down and a new government can bring democracy and freedom to Libya.
But somehow I don’t think it’s going to be that easy…
Qaddafi’s not likely to go riding off peacefully into the sunset. We could easily see months of instability in the country. If we do, oil prices will remain highly volatile and elevated.
But that’s only part of the story… something else may put additional upward pressure on oil prices.
Take a look at a weekly chart of the US Dollar index…
The dollar is currently trading at a very important technical support area (the green line). As you can see, the trendline extends back to April of 2008. Notice how the dollar index has bounced off this technical support in the past.
Now the dollar is getting dangerously close to breaking this trendline.
In addition, the trading action in the dollar has been a little unusual in recent weeks. You see, in times of market uncertainty, the dollar is usually a safe haven. As equity markets go down, investors typically move into the dollar in a “flight to safety”.
But not recently…
The unrest in Libya, along with the 3.5% pullback in the S&P 500 last week, has done nothing for the dollar. The lack of interest in the world’s reserve currency is worrisome.
The dollar must hold the green trendline or risk seeing a significant drop in the near future.
If the dollar breaks lower, it will add more fuel to the commodities fire. Oil, gold, and silver will all likely see more strength due to their inverse relationship with the dollar. You see, when the dollar falls, these precious commodities usually rise.
Of course, upward pressure on oil prices is bad news for consumers.
Rising oil prices mean rising prices at the pump. In fact, some estimate every $0.01 rise in gas prices takes $600 million out of US consumers’ disposable income. Money otherwise spent on goods to fuel the economy is instead spent filling up gas tanks.
The bottom line is this…
If the US Dollar breaks lower and political unrest continues overseas, we could see higher prices in a number of important commodities… including oil.
Obviously, it’s not what the US economy needs right now.
Category: Commodities
