A lot of analysts got excited by the recent uptick in the price of oil. Don’t get too excited. The reason why oil went up recently is because there was a temporary sag in the dollar. Now that we know that the Federal Reserve is thinking of raising interest rates, the dollar is going to continue to appreciate as more and more speculators plow their investments on to the greenback.
You have to remember that foreign exchange markets work on a purely comparative basis. It doesn’t really matter what the strength of the underlying economy is, as long as its currency is doing better than the other currencies it is paired against. Since the European euro and the Japanese yen are being devalued by the governments behind them, it is no surprise that the US dollar is so strong. However, there are blips in this valuation scheme, and expect the dollar to dip from time to time.
This doesn’t translate to buying oil or gas. Oil or gas prices ultimately are determined by demand, not by supply. Although recent supply figures have put a tremendous amount of downward pressure on the price of these commodities, ultimately, their pricing depends on global demand. The global demand just isn’t there. The demand is growing, but it is not growing fast enough to soak up the huge supply. I hope you see this point. This is why it is a bad idea to jump into oil right now when there is a very real possibility that oil can continue to crash and hit the $30 mark.
Another reason why it is not a good idea to jump back into oil despite the dollar sagging is the fact that oil pricing tends to operate on a clown car system. A key analyst that predicted the crash of oil described oil pricing as a clown car. A clown car is when a small car is filled with lots of clowns. When they are trying to get out, it takes a long time. But once they reach a certain point, the car empties out very quickly.
The same happened with the price of oil. When it was very high, it took a long time for it to crash. But once it started to dip, the crash happened almost overnight. It’s as if all the clowns were able to leave the car very quickly.
The opposite direction is also true, meaning if the price of oil is depressed, it takes quite a bit of upward pressure for the price to reach a certain level for it to keep zooming up. In fact, based on supply figures, this might not even pan out because there is just too much supply in the United States. Be very careful about getting back into oil.
