That is how much West Texas Intermediate has lost. How quickly perceptions change, and the last time I looked, the Libyan crisis was far from resolved. NATO is still doing “whatever” it is that it’s doing, and Gaddafi remains in power. But that’s a political aspect of the story that I don’t want to get into, and it cuts across oceans, ideologies, and financial interests.
From a currency perspective, and as far as the relationship between oil and the dollar is concerned, not much has happened in terms of the correlation. West Texas Intermediate hit an interim high of $114.83 on May 2, and the dollar index was at 73. Since then, the dollar appreciated 2.7% and oil dropped by a significant 26%.
But in large part, the expectation of better economic times has provided the foundation for higher oil prices, and one cannot forget that emerging markets, and the not so emerging like China, were expected to consume the commodity without regard for global economic woes. Many comments have been made that position smaller economies as if they operate in a vacuum.
Certainly the long positions were showing the sentiment, and also contributed to the furious cleansing that ensued, as reported by Marketwatch on July 29.
Money managers' bets that oil prices will rise reached their highest in six weeks, data from the Commodity Futures Trading Commission showed late Friday. The data, pertaining to the week to July 26, showed net longs at a little over 191,000, the highest since the week ended June 14. Oil spent most of last week and the early portion of this week posting gains, only to sink to a two-week low on Friday after U.S. gross domestic product numbers disappointed.
Brent has lost less, or about 14%, with the high point taking place on April 11 at $127, and the reason behind the large spread of over $20 between Brent and WTI continues to go unexplained, although many unproven theories abound.
Future scarcity coupled with runaway consumption is yet another theme that provides fundamental reasons for some to hold onto oil as an investment. But while one waits for the continually elusive conditions described above to prove true, one could broke – although the short-term ups and downs are as certain as the fact that I will have to fill my tank every week.
The risk lies in a historical adjustment between the price of oil (West Texas Intermediate) and the dollar, and without even considering that the dollar may strengthen further due to European issues, oil traded between $70 and $80 during the fourth quarter of 2009 when the dollar index was between 75 and 77.