Monday, October 11, 2010

Correlating Financial Factors to Crude Oil Q4 Pricing

Although the future of oil prices and related exchange traded funds are usually based on the basic fundamentals of demand and supply and the Crude oil prices did indeed fall after the American Petroleum Institute (API) report citing oversupply but its interesting to note that crude oil prices have been reacting more to the financial factors (such as moves in the S&P 500 index and the USD) much more as compared to the gross fundamentals of supply and demand.

Oil rose for a second straight session on Monday to top $83 as the dollar extended 15 year lows versus the yen and weakened against the euro, bolstering the appeal of commodities as an alternative investment. Earlier, oil prices had hit a five month peak near $83 a barrel, boosted by a slumping dollar after a BoJ rate cut and by tanker disruptions after a French strike and a closed Texan shipping route. November crude rose 1.42 percent to $82.63 per barrel, the highest settlement since closing at $86.19 on May 3rd.

Crude Oil vs. Financial Factors
An 8% stronger S&P 500 and a 4% weaker USD could very well push oil up to USD85/bbl level as a regression on oil as a function of the S&P 500 and the USD since September 1 suggests that current equity and currency levels are compatible with USD80/bbl oil. Crude oil prices are not only highly sensitive to global political and economic developments but also the US dollar as most of the worldwide oil sales are denominated in dollars. Usually when the dollar’s value declines as.......Read the entire article.

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