There are a host of factors affecting crude oil prices. Lately, though, it boils down to the value of the dollar. The way things are going… that’s not good news.
Oil prices have held up surprisingly well these past three months. We’ve seen geopolitical threats from Iran push prices well above $100 a barrel, while slumping demand from the U.S. and Europe has dragged prices as low as $95 a barrel.
This $5 trading range has been frustrating for investors. Indeed, I’ve watch a Macro Trader recommendation swing from red to green to red.
The factors surrounding the price of oil are getting much more attention, it seems.
Currencies have played a big part in the price of oil. When the euro tumbled so swiftly, the value of the dollar jumped… and oil prices fell.
And the inventory reports have had a bigger impact, too, when coupled with these price fluctuations.
Let me give you an example using the past two weeks of oil reports.
This week, on Feb. 1, the Energy Information Administration reported that oil inventories climbed by 4.2 million barrels. At the same time this report was released, the euro started falling against the dollar.
As a result, oil prices fell 77 cents.
Last week, Jan. 25, the EIA’s report showed a 3.6 million-barrel climb in inventories. But oil prices closed up 20 cents. Why the difference? The U.S. dollar was falling in value to the euro.
In other words, currency volatility really affects the price of this commodity, negatively when coupled with climbing supply.
And that’s why we’re seeing oil prices in this slump.
From a technical perspective, oil prices could drop as far as $95 before finding support, and the volume action indicates heavy selling for the past week.
I wouldn’t count oil down and out for long, though. But traders and investors might have to take a wider look at what’s going on. Take a look at this one-year chart of March oil futures.
View larger chart
A quick look at this chart and it’s easy to see the resistance to higher movement. The downtrend from last spring and summer has given oil prices a couple of test points. As of yet, oil has failed to beat them…
But prices also haven’t given up yet.
If oil prices can stay above $95 — and the greater factors like a still-weak dollar despite the euro mess say this is a strong level of support — then we could see prices jump easily to $100, and then to $105, if gaining momentum.
There are bigger issues keeping oil prices high. Exxon Mobil (XOM:NYSE) missed estimates on declining production. Its oil operations in Africa produced 24% less in the fourth quarter of 2011. Production in Europe dropped 23%.
Overall, crude production fell 11% for the company.
At the same time, North Sea oil exports to Asia are at an eight-year high. North Sea producers, such as British Petroleum (BP:NYSE), have shipped 8 million barrels to the region since mid-December. Bloomberg says that’s the most for any month since 2004.
The major importers are China, South Korea and Australia. China’s oil demand is expected to jump 4.3% to 9.9 million barrels a day. Developing Asia’s supposed to get a 3.8% boost in demand this year. That more than offsets the drop in demand expected in Europe.
In other words, China’s sopping up all the excess oil from developed nations. Taking extra supply off the market is putting in a floor for oil prices.
This might be a good buying opportunity for traders, though the next couple days will be rocky as oil prices test out that support between $95 and $96.
I still like the long-term picture for oil, too. And with OPEC maintaining that $100 a barrel is a reasonable price for oil, prices don’t seem to have a lot of room to move lower.
The one factor that we need to keep a super close eye on, though, is the dollar and euro. And this is what we’re up against:
View larger chart
The overall trend of the euro for the past year has been down… This boosts the relative value of the dollar, and commodities take a beating when the dollar climbs. But I said “relative.” The real value of the dollar is not climbing. Our interest rates are stuck near zero for the next two years.
But this comparison does have its effects on oil prices, so it needs to be paid attention to.
Editor’s Note: There has been some major movement in the natural gas markets over the past week. On Tuesday, the company Andy Snyder says will lead the way forward was up over 10%. He is working on a one-of-a-kind presentation to give you the inside scoop. Mark your calendar for Feb. 9 at 7:00 p.m. That’s when he’ll go public with the details.
Chart of the Day
By Adam English, Associate Editor, Inside Investing Daily
It is impossible to avoid Apple (AAPL:NASDAQ) in the news these days. If it isn’t a record-breaking quarter, it’s renewed attention on its Chinese manufacturing woes.
Ryan Cole, our Small Cap Insider editor, got me thinking about how the company will weather the steadily worsening trickle of news about Foxconn and other suppliers. One thing is for sure though…
Apple has enough cash to handle whatever comes its way.
The company has so much cash just lying around that investors are wondering if management intends to actually spend it any time soon.
Over $97 billion in cash and securities. About half of that came from the past two years alone. That is almost up to the $108 billion in annual revenue from 2011!
Apple CFO Peter Oppenheimer said the company “was not letting it burn a hole in our pockets” during the recent first quarter conference call after a number of questions about the mountain of cash the company has built.
There are some problems though, and a common culprit is to blame…
About $64 billion of the savings are held offshore. The federal government takes a hefty 35% tax on any money that multinational businesses bring into the USA. Naturally, Apple and a number of other companies are pushing for a tax holiday, but there has not been a lot of interest from Congress on it.
So, what will Apple do? Dividends maybe? Share buyback perhaps? Maybe some giant mergers or acquisitions?
Tons of people are speculating, but one thing is for sure. Apple is looking exactly where Ryan is looking… small caps.
Under Steve Jobs’ mythical tenure, Apple purposely avoided large mergers and acquisitions.
It looks like Apple is continuing that strategy after he passed. The company just picked up a manufacturer of cutting-edge flash memory drives. Israel-based Anobit Technologies cost Apple a paltry $390 million.
Apple has plenty more cash to burn…
Fed Chairman Ben Bernanke said on Thursday February 2nd that the economic recovery in the US remained “frustratingly slow” and the Europe’s debt crisis has complicated the recovery process even further. He lamented that there is risk that the developments in Europe may result to unfavorable outcome which could worsen the economic prospects in the US. He also made it clear to the house Budget Committee that Federal Reserve was committed to economic recovery and it is doing everything possible to avoid economic delay.
