Oil prices, gas prices and dollar offer some silver lining

By Pete Southern in LiveWire Economics Blog | October 10, 2008 9:14 |

It is hard for many American investors and consumers to find hope in a dark and dreary economic environment, but a 12-month low Thursday (October 9) in oil prices and a surging dollar offer some. Finding something positive is important on a day when the Dow Jones reached its low mark since 2003, with a close of 8579 on Thursday. This includes the 675 points given up on the index in the day’s trade.

Though many analysts agree recession is here and sure to show in the fourth quarter of 2008 and the first quarter of 2009, and credit troubles are abound, falling oil and gasoline have offered some day-to-day expense relief for consumers and businesses. After a close of $86.59 (down $2.36 for the day) US light sweet crude oil dropped to $84.63 in post-settlement trade. This marks the low point for the commodity since late October 2007.

Just as it is hard imagine the incredible devastation that has hit stocks in a short time, it is equally remarkable to comprehend that oil has dropped from $147.25 at its mid-July high, to below $85, less than four months later. This is over a $60 fall per barrel in crude in about 100 days.

Interestingly, as American politicians and administrators meet to try to decide how to fix the US economy and credit and housing markets, OPEC members have planned an emergency price meeting on November 18 in Vienna. The leading members of the Oil Producing and Exporting Group want to discuss options to stem the dramatic slide in oil prices that has significantly impacted crude markets. Cutting output to reduce supply is likely the move for the group if prices continue to sink.

The Energy Information Administration (EIA) reduced its oil demand projection for 2009 by 140,000 barrels per day. This is obviously a pretty significant expectation for lowered demand and would make it tough for oil prices to remain up without some reduction in current supply trends.

Of course most Americans are not immediately concerned about the oil markets. However, the correlating effect of lower gas prices is a factor that is of great interest to most. Many transportation-driven businesses are relishing gas prices that are well over $1.00 below mid-July prices. Consumers who are concerned about the overall economic crisis can at least appreciate less expensive prices at the pump. In many markets, gas prices have fallen below $3.00 per gallon. In mid-July, unleaded topped out just above $4.11 per gallon.

The dollar has also been a beneficiary of recent speculation. Beaten down well ahead of the economic crisis, the dollar is firming up against the Euro, Pound, Swiss Franc and other major currencies that had been relatively strong against the greenback in the last twelve to eighteen months. The Euro is fetching about $1.35, with the Pound at just $1.70. This is $.26 and $.36 below highs earlier in the year for each. The relatively stronger dollar has been aided, somewhat, by the growing concern that the US economic struggles are going global – particularly in European nations.

Consumer prices have and should continue to fall if the higher dollar trend continues. Staple foods like milk, eggs, and cheese have been more expensive at the grocery store this year because of the weak dollar. Thus, despite the cloud of pessimism hovering over the broader market, movement in oil and consumer prices offers a ray of hope.

Market Recap

Stocks started higher Wednesday thanks to a concerted effort on the part of several top central banks who made emergency funding rate cuts simultaneously to help boost the global economy. The Fed lowered its fund rate from 2 per cent to 1.5. The Dow fell hard late to lose 189 points. The Fed awarded AIG a $37.8 billion loan. The Dow reached its worst point in 5 years on Thursday with a drop of 675 points. The index closed at 8579. The NASDAQ and S&P were down 95 and 75 points. The dollar fell below 100 yen. Oil prices hit a 12-month low.

Neil Kokemuller
Thursday, October 9, 2008
7:24 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.

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