Sunday, November 13, 2005

OIl vs USD

(The green line indicates the Oil price and the red line , the US Dollar value.)
The above picture shows the current general direction of the Crude oil prices and USD value. The oil prices have been trending up since 2002 and USD has been trending down since 2002.
Commodity prices go up or down based on supply and demand. Oil prices went up because of supply concerns from world over and demand increases from developing nations like China,India and increased economic activity in the Asian tiger countries.
Oil is traded in US Dollars, so if the USDollar goes up or down in value the price of oil changes. So, if the dollar goes down in value the Oil price goes up, since it requires more dollar to purchase the same amount of oil and maintain the same profitability.
Since the oil demand has been strong for the past years and the dollar value has been going down, oil prices shot up.
Since the second quarter of 2005 , USD value has been going up and we are seeing now ,a downward move in oil prices. since the demand is strong Oil prices will stay high above the average prices we have seen in the last decade even if the USD value goes up. But if the USD remains strong and there's a slight indication that oil demand is slackening, the oil prices will plunge (like in late 90s -below chart) because less dollars will be needed to purchase the same amount of oil.
The above chart is from 1995 to 1998.
You can see clearly the relation between Oil vs USD vs Oil supply/demand. Oil and Dollar was trending up in 95 and 96, In 97 when Dollar (in red) value shoot up, OIl started trending down, and in 1998 when Asian Tiger countries started have economic issues, Oil came plunging down due to poor demand and high value of the USDollar.
Can the same story repeat this time? Don't know, but one thing is going in the right direction, the value of the USDollar, it has been treding up since june 2005.

1 comment:

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