Oil futures posted their biggest decline in over a year, burning some investors. Increasing supply and production from the United States and Libya, along with a strengthening dollar and other global developments, have sent oil prices lower. Prices are now currently at their lowest point since early December. Does this mean oil is trending negative, or could it present an investment opportunity for people looking to make money off of futures?
Prices for light, sweet crude for February delivery dropped by 3.0%, or $2.98, with prices per barrel dropping to $95.44. Many events have contributed to this short-term drop, including high supply and production in the United States. As the world’s largest economy, supply and production in the United States can have huge impacts on oil prices.
Unsurprisingly, the United States is the world’s largest consumer of energy. That’s why when domestic supplies are high, oil prices often decline as the country has enough oil on hand. The United States and Canada have used recent technological breakthroughs to extract oil from new sources, such as shale oil sands. Given that the United States has gone from a net importer to a net exporter, it should be no surprise that oil prices are declining.
At the same time, global oil production is on the rise. Where is all of the extra oil coming from? For one, previously war-torn countries, such as Libya, are increasing their output. With relations warming between Iran and the United States, Iran could soon be pumping out more oil. Given that Iran is home to the world’s 4th largest proven oil reserves, this could result in a large increase of oil supplies.
Strengthening Dollar Sending Oil Futures Lower
Beyond supply and production, a strengthening dollar is also sending oil prices lower. Why? For one, as the dollar strengthens, more people are parking their money in it. Generally speaking, as the dollar strengthens, it puts pressure on dollar-denominated commodities, such as oil. Many analysts are now projecting the dollar’s value to increase through the start of 2014, which will put pressure on oil regardless of supply and demand.
So why is the dollar set to rebound? For one, the U.S. economy is stabilizing, but this news could actually relieve downward pressures as demand for oil increases. At the same time, however, the United States is rolling back its stimulus measures, which have previously injected additional dollars into the market. This kept the dollar artificially low. As these measures are “tapered”, the dollar should strengthen as the supply of dollars stops its expansion.
Add the fact that the U.S. economy is gaining strength after years of sluggish growth, and the U.S. dollar almost seems destined to rise through the start of 2014. As economy grows, investors will become more confident in the dollar. This helps to push the exchange rate of the American dollar higher.
Oil Futures May Rebound
As we have already mentioned, the dollar will rise as the U.S. economy recovers. This might send demand lower in the short-term, but as America’s economy picks up pace, demand will increase. This should spur manufacturing output across the world. This might help set the stage for a future rise in oil prices.
One thing to remember about oil is that it is essential for the global economy. Along with gold futures, oil futures are often viewed as one of the safer investments in the commodities futures market. Short-term declines are not surprising, especially with increasing production. Still, if the economy continues to strengthen through 2014, demand for energy will rise. Thus, while oil might suffer some short-term losses, don’t be surprised if it rebounds in the coming weeks.
After years of tepid growth, many economists and forecasters believe that the global economy could be in line for a strong period of expansion in 2014. If so, demand for energy should rise, which should push oil futures higher. Nothing is guaranteed, of course, but don’t be surprised if oil prices rebound as the global economy strengthens.