8 April 2015

The Fed's Big Role in the Oil-Price Game

April 7, 2015

Most analysts are on the supply side of the oil-price equation. But there is something else at work—demand. Demand growth has been taken for granted for the better part of the twenty-first century: China built infrastructure and its economy grew, which created more demand for crude oil, and the cycle repeated. Now, demand growth is more tenuous, and far more price sensitive than it was in previous cycles. The familiar refrain “oil cannot stay low forever” may be true. But it can stay low for a prolonged period of time.

Oil is a dollarized commodity. And this means the U.S. dollar has a direct effect on the price of oil—specifically in non-dollar terms. This implies that the dollar’s strength matters for oil’s price recovery, because it can dramatically affect the price that non-U.S. buyers must pay without the dollar price of oil moving.

No comments: