Weak Dollar Fuels Oil Price Hikes

In Financials on November 14, 2009 at 13:51

oil on waterDespite record-high inventory levels (rose 4.3 per cent in OECD countries on annual basis), oil prices have exhibited a strong positive momentum primarily driven by global recovery led by the emerging economies. However, Exxon Mobil’s CEO and Chairman Rex Tillerson told CNBC that a big boost comes from the weak dollar.

As oil is priced in dollars, the cheaper ‘greenback’ makes oil more affordable and attractive to investors. What is more, oil can also act as a hedge between commodities and the dollar. Oil has more than doubled to above $70 from its $30 lows but is still half of its all time highs back in July 2008. In Tillerson’s view, the weak dollar is contributing about $20 to $25 dollars to the overall oil prices at the moment.

This week, IEA revised oil prices slightly higher for 2010. It also warned that persistent higher prices may derail economic recovery. But is that truly the case? Not necessarily. Firstly, oil prices would have to climb above $140 a barrel to start erasing growth and secondly, even if growth was halted, prices would fall rapidly, supporting a quick recovery.

One should be more worried about the dollar value than the price of oil as its side-effects on the economy are deeper and more complex.

by the Self-Seeker

  1. Absolutely agree with Mr. Tillerson. “oil can also act as a hedge between commodities and the dollar” – It DOES act as s hedge…especially before crisis oil wan bundled with mortgage giant companies (mainly in the short term portfolios). In last week Economist they implied that after crisis derivatives of real sector production companies may substitute mortgage companies in stock markets. The question is whether they follow the fate of Freddie Mac?
    About the value of US dollar…the trend does not change generally – Federal Reserve policy of cheap dollar forever! And i think, they can buy out any debt with “worthless” dollar.

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