Why oil prices are headed higher

After months of quiet in the energy markets, a drop in the dollar suggests the cost of crude is going up.

By Anthony Mirhaydari Oct 17, 2012 2:52PM

ComstockIn Tuesday night's presidential debate, one of the questions focused on the rising cost of gasoline. While middle-class wages have stagnated, fuel prices are just one of the many costs of living that are pinching the bottom line for so many people. During the financial crisis, wholesale gas prices fell below 80 cents a gallon. Now they're near $2.80, with retail prices well above that.


At the debate, President Barack Obama rightly noted that some of the rise has been associated with a better economy. And tensions in the Middle East, especially with Iran, are certainly playing a role (although analysts at Societe Generale believe it's fairly small). But a large and important driver has been the fluctuation in the U.S. dollar, which is a unit of denomination for global oil transactions.


Here's the bad news: A renewed decline in the dollar suggests prices at the pump are about to get more painful.



Why? Since Obama took office, fluctuations in the value of the dollar have explained about one-third of the movement in crude oil. The relationship is inverse: As the dollar falls and loses value, the price of oil rises in response.


Thus, with the greenback dropping hard out of multimonth consolidation range, crude oil should see upward pressure in the weeks to come.


But why is the dollar weakening?


For one, the situation in the Eurozone seems to be calming. Moody's just reiterated Spain's investment-grade sovereign credit rating. Officials seem to be moving closer to cobbling together a bailout plan for Spain that would activate the European Central Bank's new but unused bond purchase program. And even Greece is showing progress as it moves towards unlocking its next bailout fund disbursement thanks to tough budget cuts.



Also, the Federal Reserve is full-throttle on the monetary policy stimulus here at home after it announced a new, open-ended $40 billion-a-month mortgage purchase program last month. All those freshly printed dollars entering the financial system pushes down the value of the currency and will soon start pushing up the monetary base again, as shown in the chart above.


Plus, aside from the dollar weakness, Wall Street seems to be marking up global economic growth expectations this week, with investors moving into economically sensitive areas like materials, energy and emerging-market stocks, industrial commodities and, yes, crude oil. Both China and Germany seem to be inching toward new stimulus measures, which will help. 

For now, this is good news and is a reflection of some new confidence. Down the road, consumers will feel the pinch from higher gas prices -- something that could pull measures of consumer confidence down off of their post-recession highs.



I'm recommending my newsletter subscribers and money management clients move heavily into the energy sector to take advantage of these developments. Examples include the Energy SPDR (XLE) sector ETF as well as more focused plays like Seadrill (SDRL). I'm adding both to my Edge Letter Sample Portfolio.


Disclosure: Anthony has recommended SDRL and XLE to his clients.


I found XLE and SDRL with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

Oct 17, 2012 4:24PM
For what it's worth, if Obama would have paid more attention to energy independence in our country we would have cheaper fuel and more jobs. In stead he spent $38,000,000,000.00 on green energy that produced 3545 jobs at a cost of $4,853,000.00 per job, and that's before so many of those companies (major contributors to his campaign) went out of business.
Oct 17, 2012 4:37PM
Devalue the dollar some more , PRINT , PRINT, PRINT . Thanks Mr Bernanke and President Obama . The price of fuel is crushing my small business !
Oct 17, 2012 4:36PM
I track the value of the dollar on the world market daily. While it is constantly fluctuating, it does not swing that much either way. Much like other influences, when the trend is for the dollar to decline the increase in gas/oil prices is far greater than the comparable incline v. gas/oil price decrease. In short, I call BS on this lame attempt to deflect attention and blame for the true cause. If Obama cannot do anything to help with the price of gas, why did he release some of our strategic reserves a few weeks ago to "help prevent sharp price increases?" Greedy liars the lot of them.
Oct 17, 2012 4:54PM
STOP ALL  the oil speculators !!!!. That is what drives the price up.  They make millions doing this and we pay for it at the gas pump
Oct 17, 2012 4:07PM
Maybe if the author (and other financial writers) would stop saying the price of oil will go up: IT WOLN'T which would be a big help to the economy as a whole.
Oct 17, 2012 4:43PM
Well, speculators, I'm going to do EVERYTHING I can possibly do to make sure your business is taken back out in the alley and kicked where it counts like we had to do a few years back when you all pulled this stunt...I write letters to ALL my legislatures telling them they better find some way to bring gas down or we'll see to it that they'll be fired,  and I bike everywhere I possibly can. We can nearly supply our own fuel needs thank you, and the declining dollar DOES NOT justify it being 3-4 times more than what it needs to be.
Oct 17, 2012 5:10PM
BS BS BS BS BS BS BS BS did I say BS? The prices are where they are at because the scum bags can do what they want without impunity. I am sick of these lying SOBs saying the cause of the price rising is because a  camel belches in the Middle East. Greed and arrogance is why the fuel prices are high. IF THERE IS ANYONE WHO THINKS IT IS BECAUSE OF THE REASONS THE OIL COMPANIES ARE LISTING YOU ARE AS STUPID AS THEY ARE GREEDY.
Oct 17, 2012 4:59PM

right on the ball obama you POS

to worried how to help China, and russia, screw the USA, he doesn't have a clue to help his own country, "or does he" where did he come from.??


Oct 17, 2012 4:25PM
How far back would you have to look to see this guy saying that oil prices are/will fall(ing)? The "mouthpieces" fopr stocks and commodities constantly barrage us with "sky is falling" messages. As the "I design" commenter noted, how much of this is reality and how much is the " stampede" thinking? 
Oct 17, 2012 5:23PM
The Government would have been better off spending the $38,000,000,000.00 putting american built solar panels on 4,000,000 homes. It would have crated a lot more than 3,500 jobs, we would be more energy independent, and our carbon footprint would have been reduced. Perhaps Solyndra would have survived and thrived without government money with an increased demand for their product. In stead we thoughtlessly ignore the free market system, warnings from the General Accounting Office, and through reckless spending, throw money into not well thought out spending bills.
Oct 17, 2012 5:39PM

Regardless of anyones political brand, a fact that will have to be dealt with for decades is that fossil fuels will drive the global economies. Emerging and growing economies in China and India, with over a billion in population each,, alone will place upward pressure on oil prices. Add a devalued $ and they will rise more. Its on every corner and nearly all consumers buy gas and notice it in their personal lives. Few stop to think about the fact that nearly everything they consume is a petroleum by product. Plastic, glass, tape, cosmetics, medicine, steel, lubricants, paint, food,fabric, fertilizer etc.. All these items increase in price as oil goes up in price.

Wind and solar will never produce the chemicals that go into these products, nor will it power the trucks, trains and airplanes that distribute the goods. Our economy has benefited greatly from cheap energy for decades and no current alternative form of energy, given current technology, is even close to displacing fossil fuels at an affordable price.

Our greatest resource that can minimze economic and environmental impact is natural gas. Not perfect, but cleaner than coal, plentiful, and easy to develop and get to market. while alternative sources may help power homes and a few automobiles at some point,it is scientifically impossible to hope for much in the near term from these sources.

Any discussion about energy without costs per BTU as the central fact of science is nothing more than fantasy and idealogy. Green job technology at $4 million/job is economic suicide. European countries that have already went down that path are scrapping those programs and returning to sanity. Spain lost 2 jobs for every 1 green job created and is now expperiencing 26% unemployment and seeking a bailout from the IMF and European Central Bank to avoid collapse.

Current administrations subsidies for green energy are littered with failure. I am for developing these technologies, but fund the research at MIT, Stanford, U of Texas etc to develop and prove the technology commercially feasible before trying to force it on the marketplace. Quit giving it to political allies involved in commercial ventures that are abandoned as soon as the subsidy is withdrawn.

With shale technology, we are capable of completely cutting off hostile countries inports in 7-10 years if we gave it serious effort. I am sick of keeping thousands of troops, fighting wars, and spending financial and human capital so we can protect oil imports from our enemies when we can develop our own with, best estimate, 5 million new jobs over 5-7 years.if you factor that cost into a barell of oil, the true cost is above $150 a barell.

Only a an idiot believes we will ever be totally independent but it would be in our best interest to get what we need from Canada and other allies. Even the big greedy oil companies know that oil, made into by products, are worth 3-4 times more than using it as the primary source of transportation power.

Take a vacation to N Dakota, W TX, S TX, N LA and see first hand what good paying jobs are created by exploring for our own resources. Thousands of jobs are created outside those areas also. Caterpillar equiptment, drilling rigs, pipe, gaskets, lubricants, inspection equiptment, valves, well monitoring and emission monitoring equiptment, water purification, testing, maintainence equiptment and workers, hotels, restaurants, auto dealerships- I caould go on indefininitely having grown up around the industry but I find that most people dont realize the national benefit of energy development.

Ill quit for now but the way out of our situation isnt that complicated. It begins with creating GOOD paying jobs. Next we will tackle government spending-thats the other half of paving the road to prosperity.

Oct 17, 2012 5:06PM
Oh yes,LR it will cause oil to go up.Haven't you been watching,that's all Wall Street and oil speculators need is W O R D S !!! This whole fantasy market is built on W O R D S ,not reality or facts just what might, could,  may,  possibly, come to pass.The bad part is after the fake "rally" nothing they said ever happens.If this guy holds any weight at all,we will see oil go up and especially in time for the holiday season. PATHETIC ! ! !
Oct 17, 2012 4:57PM

Honestly, I don't get the whole "energy independence" thing. Yes, we're producing more domestic oil, but it goes into the world market. Even that vaunted pipeline from Canada which is supposed to solve our problems, I do believe from what I've read, only sends oil into the world market by tying into the pipelines that head to the tankers going wherever in the world tankers go.


So it's not like producing more oil here in the US makes us energy independent. Unless we were to somehow prohibit domestic oil from going abroad, which would have people screaming about communism and the threat to capitalism.


The only way more US oil helps bring down the price of oil overall is by increasing the world supply, and by that token it's also not like we can do anything to keep demand from rising in China and India, which of course increases the price. Even reducing demand here by making cars more fuel-efficient etc is only a blip compared to the entire rest of the world using more oil all the time.


At the same time too, there's a whole lot more to the price of gas than just the price of oil. Drill baby drill also requires build more refineries, both to meet demand and to provide some redundancy when the mysterious "refinery went offline" problems occur. And no one seems to want a new refinery in their backyard...


Unfortunately, Obama was right when he said the reason the price of gas went down is because demand went down, and why? Because fewer people buying gas means lower demand. Wanna bring on the next recession just to lower gas prices?

Oct 17, 2012 6:05PM
Heck just a few months ago the consensus was pretty much that oil was headed lower. Some were even predicting some pretty big drops. It is all manipulated.
Oct 17, 2012 6:07PM
Dadgum speculators and politicians, and wall street hoodlums, we don't stand a chance when they lie about everything just to make millions of dollars for their pockets!
Oct 17, 2012 4:53PM

What is wrong with you people? Do you really think reporting or talking about oil prices increasing it is going to make prices go up?

If that was the case* my privates would be enormous. I can tell you from experience that my girlfriends still call me tiny.

Oct 17, 2012 6:17PM

Another smoke sreen by the oi industry to raise prices. The industry has gone out of its way to

sabotage green iniatives. Back in 1979 many progressive proposals were initiated by federal

and state groups, backed by rebups and dems that were lobbied to death by the industry. The oil industry at that time proposed numerous regulations, that is right regulations, on alternatives to make it more costly and difficult to implement. Who says big corps don not like regulation. In their favor? Of course they like regs.

Oct 17, 2012 5:41PM


Any excuse they can make, to keep gas prices going up.

Gas was headed towards  $3.40 a gallon in Detroit, and falling elsewhere too.

Thats the real reason they try to prop up the price of oil, any excuse.

Oct 17, 2012 4:56PM
Anyone else wanna tell me the president has nothing to do with gas prices?
Oct 17, 2012 6:16PM

Oil prices are kept high by Wall Street speculation...why would they bring it down when oil companies can make huge profits by keeping it up.  We need more price controls on this resource...free market simply means a few powerful people can manipulate the price in order to make themselves wealthy.  The thing I don't understand is if the oil on the world market costs more and they claim they are passing the costs along to the consumer, how come it only seems to increase the oil companies profits...seems if they were paying more for it like they claim, their profits margins would stay the same. 

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