Posts Tagged ‘U.S. Dollar’

WASHINGTON (Dec. 5, 2011) —

Crude oil prices moved slightly higher today, building on the upward momentum of last week.  Equities markets continued to surge on positive signs for the U.S. economy and renewed optimism that Europe may address its debt crisis.  These same factors, along with weakness in the U.S. dollar and geopolitical concerns with Iran, put upward pressure on oil prices as well.  Oil futures are priced in U.S. dollars, and as the currency weakens relative to those abroad, the effective purchasing power of those holding foreign currencies increases.  As this happens, oil futures become a more attractive investment, which exerts upward pressure on prices.  At the same time, mounting geopolitical tension between major-oil-producer Iran and the Western countries that rely heavily on foreign oil — including today’s report that Iran shot down a U.S. drone this weekend — sent prices higher on increased uncertainty surrounding the Iranian supply of crude to Western markets.  The sum effect of this upward pressure was West Texas Intermediate (WTI) crude oil settling three cents higher at $100.99 per barrel at the close of today’s formal trading on the NYMEX.

Last week’s increase in crude oil prices was keyed by positive economic news both internationally and domestically, and geopolitical concerns surrounding Iran.  Global central banks on Wednesday unexpectedly announced a coordinated move to inject liquidity into the financial system and address what has been growing concern surrounding the debt crisis in Europe.  This news helped stock indices surge, with the Dow Jones Industrial Average posting its largest one-day gain in more than a year, and oil prices move higher as well.  The upward momentum for oil prices was dampened by a bearish same-day Energy Information Administration report, which highlighted a drawdown in crude oil stocks but more importantly continued weakness domestic gasoline demand. 

On Thursday the European Union and U.S. announced they would tighten sanctions against Iran over that country’s suspect nuclear program.  This report built on those earlier in the week of Iranian protestors storming the British embassy in Tehran and speculation that the EU could start an embargo on Iranian crude in January.  While Iran warned that such sanctions could send global crude oil prices as high as $250 per barrel, the impact on the market was muted as traders viewed these developments as posturing rather than market moving.  The EU imported 450,000 barrels per day of crude oil from Iran last year and any news that escalates the situation beyond posturing could have a significant impact on crude prices.

Optimism that the U.S. economy is recovering was boosted by data on Friday showing a much better than expected jobs report.  This built on reports earlier in the week that U.S. manufacturing activity had reached the highest level in five months and of positive consumer spending and private sector job creation numbers.  A recovering U.S. economy would be expected to demand more crude oil and put upward pressure on crude prices. 

Since the beginning of October, crude oil prices have increased substantially while retail gasoline prices have decreased.  Crude prices have increased from $75.67 per barrel on October 4 to $100.99 today.  During this same period, gasoline prices have decreased 15 cents per gallon.  This seemingly counterintuitive price movement is primarily due to historically weak demand for gasoline counteracting the upward price pressure traditionally expected with higher crude prices. The weekly Department of Energy report last Wednesday showed domestic petroleum demand of just 17.946 million barrels per day — the lowest weekly number since June 2009.  While gasoline demand was up 177,000 barrels per day from the week prior, this increase was attributed to Thanksgiving holiday travel and was 3.8 percent lower than the same period in 2010. 

The current national retail average price for a gallon of self-serve regular gasoline is $3.28.  Today’s price is two cents cheaper than one week ago and 14 cents cheaper than one month ago but is 34 cents more expensive than one year ago. 

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