Hello finance peeps! Today I’m going to talk about crude oil. If you have been tuned in to the markets for the last several months, perhaps you know or at least have heard from someone that commodities like gold and silver have recently marked their new historical highs. But unlike those two metals, the people’s “black gold” managed to stay out of the radar. In fact, during the time when both gold and silver were making new highs after another, the price of crude oil has only traded sideways – between $70.000 per barrel and $87.350. As you can see from it’s weekly chart, the price of crude oil is now trading right at the trading range’s or the box’s resistance. Two scenarios can occur next. One is that crude could break above the said resistance. If it does, then it’s next upside target would be at the psychological 100.000 level. But given it’s overbought condition, it could also bounce off the resistance and weaken once again.
The question now is, will crude oil follow the gold’s path?
The US Federal Reserve’s (central bank) decision to flood the market with more dollars by buying additional $600 billion worth of long-term US Treasuries or US debt over the next eight months only further dilutes the greenback’s valuation. Of course, it is the intent of the central bank to lower the day-to-day lending rate in the US to encourage more lending, thus, more spending. So just by looking at the US’s money supply, the expected and earmarked increase in money would as we know reflect negatively on the dollar against other assets like the anti-dollar currencies, commodities like gold, and now perhaps even oil.
Investors, of course, would have no choice but to divert their funds away from the greenback to commodities like gold and now, silver as they presummingly retain their intrinsic value. And given the decline in the dollar’s purchasing power, the oil producers/sellers which have accounts receivables that are denominated in dollars would sooner or later be forced to hike their prices or at least influence such by controlling the supply end to compensate for the USD‘s downfall. On the demand side, since oil is essentially the lifeblood of the global economy as practically most industries run on it, an improvement in the state of the global economy which would increase business activity, would consequently increase the need for oil as well, reflecting an to a higher price.
Therefore, a jump in the prices of crude would of course boost the oil companies’ revenues, thus, making their shares more attractive. Such would likewise reflect on currencies like the Canadian dollar or the Loonie. In case you do not know, Canada’s major export to its neighbor down south (the US) is crude. Hence, an increase in oil demand from the US given a expansion in oil prices as well would push Canada’s overall output (in terms of dollars) also. Furthermore, it has been observed that crude oil and the Loonie have a relatively high positive correlation. Meaning, an increase in the prices of oil would usually reflect on the Canadian Dollar.