“Is it really oil (up 3%), natural gas (up 8%), copper (up 4%), stocks (up 2%) and everything else going up — or is it really that the dollar is falling (down 1%)?”

It’s thought that the massive runup in the price of oil was linked to the U.S. Dollar falling against the Euro.

I did a little research and found a chart that plots the price of oil against the price of the Euro. As you can see there is a correlation between the two but is it enough to link the two? I’m not sure. I’m NOT an expert on this stuff but thought it would make for something interesting to look at. Here’s the chart (click to see a larger version):

The Price of Crude (BLUE right axis) vs.
The Euro (GREEN left axis)

From it’s low of around 1.25, the Euro has rebounded to around 1.44, an increase of 15%. From it’s low of around $44 to it’s recent price of $71 per barrel, oil has increased 61%. Granted, a lot more goes into the price of oil than just exchange rates. Supply and demand is the main factor. I also don’t think we can dismiss speculation from the equation. I just can’t believe that last year’s huge rally was due to supply and demand.

Thoughts?

I would like to know if this “economist” has any ties to oil? The comments to the piece are quite interesting and lively.

UPDATE…

Right on cue, the market reacts:

As of this writing, crude oil is up over $2 a barrel.

The price of oil starts moving up and all the sudden we have all these “experts” with their predictions.

NOT ANYMORE!

Take a look at some of the quotes from this article ($) in today’s Wall Street Journal:

Shrinking oil revenues have also begun to eat a big hole in the budgets of oil-producing nations, several of which have based government spending on prices well over $70 a barrel.

Both Iran and Venezuela have warned their citizens of leaner times ahead as leaders rein in social spending. The pain has been particularly acute in Russia, where falling energy prices and the international credit crisis have halted a nearly decadelong boom.

It looks like those governments made a big mistake! I’m loving the fact that one of the countries hurting is Venezuela. I can’t stand Hugo Chavez. He has been banking on high oil prices to carry out his mission of turning his country into a dictatorship.

Something else interesting (emphasis mine)…

After a long run of soaring prices and rising demand, OPEC faces its strongest headwinds in decades. Demand is retreating sharply — and may never return to its 2007 levels — in the U.S., the world’s largest oil consumer. Europe and Japan are also skimping. But most chilling for OPEC are increasing signs of sluggishness in China, until now the primary driver of demand growth.

Oil demand in China fell in November for the first time in four years. Next year, demand is likely to grow by less than 3%, according to New York-based energy analyst Paul Ting, almost certainly too little to outweigh the declines in developed economies.

Funny how things go from one extreme to another. A few months ago we faced insatiatable demand. Now, demand is dropping dramatically and may never return to the levels seen in 2007. Interesting…

I’m wondering if the demand was ever there in the first place or if prices were being driven solely by traders.

No matter, if I was running a business dependent oil and gas, I would be doing what I could to lock in today’s prices because we all know that in the long run they are headed back up.

I will say that I’m enjoying the lower prices. I filled up the other day and spent about $25. A couple of months ago, I would have paid nearly $70!

Oil dropped another $3.12 to $43.67…the lowest level since January 2005.

If someone would have told me back in July that oil was going to be trading in the 40s by the end of the year, I wouldn’t have believed them. It’s simply amazing how quickly things can turn.

Of course the bad side to all this is that now there’s less incentive for finding alternative fuels. I guess all those plans will get put on the back burner until it makes financial sense to go for them.

…regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but that may not be accurate, people familiar with the regulators’ thinking say.

Unexpected drops in oil inventories reported each Wednesday by the U.S. Energy Information Administration can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange. A company could theoretically underreport barrels in its tanks, for example, at a key hub to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news.

Another concern is whether companies conduct some physical oil sales and purchases solely to influence short-term pricing on oil futures markets.

I think there’s no question that this kind of stuff went on. Yes, oil is up due to increased demand, but should it have been up that much? And, should the market have seen such big swings in the price of oil? It will be interesting to find out what regulators uncover (if they uncover anything).

While we’re on the topic of oil, I thought this article from earlier this week was interesting too. Apparantly Iran was seeking to cut oil production due to the recent drop in oil prices. Iran is a member of OPEC. OPEC’s president earlier this summer said that the price of oil was up due to speculation and the value of the dollar, NOT because of supply. Now Iran wants to cut production in order to keep oil prices up. Interesting…

I just hope the recent drop in oil prices doesn’t cause us to get too comfortable. Like many commenters have said on my other oil posts, a LONG-TERM solution is needed. We need to be investing in alternative sources of energy and drilling for our own oil. Let’s just hope lower oil prices don’t cause us to lose focus.

The price of oil is down nearly 26% if you use the record settlement of $145.29 and a current price of $107.76.

What’s up? I have no idea but I would venture to guess that the high oil prices we saw earlier this year had less to do with fundamentals and more to do with speculation. I just hope prices can stay low but I realize that’s probably wishful thinking.

Crude Oil’s down another $5 per barrel so far today, which puts it about $32 below the high set last month.

How low will it go?

Sure, the drop in prices is probably temporary but I like what I’m seeing so far.

According to the article I read in yesterday’s Houston Chronicle, President Bush’s lifting of the ban on drilling is largely symbolic because congress has its own moratoriums on drilling. But, it does put the pressure on congress to do something about high oil prices.

Will it work? I have no idea. I really wish we had a plan! A real, comprehensive energy plan. Anyone want to head that up?

Unlike perishable agricultural products, oil can be stored in the ground. So when will an owner of oil reduce production or increase inventories instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise.

There are of course considerations of risk, and of the impact of price changes on long-term consumer behavior, that complicate the oil owner’s decision – and therefore the behavior of prices. The Organization of Petroleum Exporting Countries (the OPEC cartel), with its strong pricing power, still plays a role. But the fundamental insight is that owners of oil will adjust their production and inventories until the price of oil is expected to rise at the rate of interest, appropriately adjusted for risk. If the price of oil is expected to rise faster, they’ll keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will extract more and invest the proceeds.

The relationship between future and current oil prices implies that an expected change in the future price of oil will have an immediate impact on the current price of oil.

Thus, when oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

That would explain why OPEC isn’t falling all over themselves to produce more oil. Why would they want to do anything that would lower the price? I do think it’s almost criminal for OPEC’s president to come out and make predictions on the price of oil. What does he think is going to happen when oil is trading at $140 and he says it’s going to $170? Surely he knows he has the ability to drive prices!

Anyhow, read the entire editorial. He makes a lot of sense.