(September 2020)
Oil prices are in a very interesting place. The market has rallied significantly since its spring lows, and it has a very nice tailwind behind it. That tailwind is the weakening US Dollar. Oil is priced in Dollars, so a weaker dollar makes it cheaper for other countries to buy oil. However, on balance, most analysts think oil prices will likely stagnate or fall from here, especially considering the huge volume of existing oil inventory globally. For instance, according to RBC capital, “We believe that the impact of a cheaper dollar from current levels will see a minimal impact on crude purchases, irrespective of slightly more favorable crude pricing … The relationship between demand and price elasticity is blunted in the current environment, because oil is already cheap and readily available and there currently exist a dearth of buyers”.
(Houston)
FINSUM + Magnifi: Currency tailwinds can only take oil so far. At some point real economic demand needs to drive prices higher and that does not seem to be happening yet. So, a bet on oil is a play on the global economy.
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