When investors begin to make advanced investment decisions, it is important to evaluate past market trends and historical data. Troy Eckard, CEO of Eckard Global, has analyzed data and noted a direct correlation between the U.S. dollar and the price of crude oil.
Many analysts and industry experts have been talking about over supply and lower demand as major reasons for the price of oil falling so quickly and dramatically over the last ten months. There is no question that the traditional supply versus demand argument has a very relevant part of the market’s pricing for crude oil. However, after analyzing the data, Mr. Eckard argues that there is a much more significant reasoning that is responsible for the majority of the crude oil price erosion.
The most direct effect on crude oil prices over the last 18 months and one that resonates with the current 2014-2015 crude oil market scenario is highly affiliated with the strength of the U.S. dollar.
As the data in the graph above shows, once the U.S. dollar started to gain strength, the asking and market price for crude oil and gold began to sink.
Today’s dollar inversion is much more dramatic than previous historical charts. Why is that?
The more global and economically unstable the world becomes, the greater probability the U.S. dollar becomes a strengthening benchmark of stability and increasing value.
As other economies try to buy and sell goods, the world currency market will shift to favor currency that is more trustworthy i.e. the U.S. dollar.
As other nations trade intangibles like internet services, online consumer consumption to hard deliverable goods such as oil, food, materials, metals etc., the more the weakness perceived in other nation’s economics drives the world to invest in the U.S. dollar and U.S. investments.
The dollar and the global perception of our economy in comparison to all other global economies has provided an attraction to the United States. This attraction and the global interest in U.S. assets and the safety of the U.S. dollar has led to an unintentional erosion of the price of crude oil.
The value and pricing of the U.S. dollar has soared nearly 20% over the last 12 months. This advanced strengthening of the dollar and a continuation of an ongoing upward movement of the dollar has been one of the biggest reasons for the collapse of West Texas Intermediate pricing and the global crude oil price collapse. The change of crude oil pricing trails behind the U.S. dollar but it eventually becomes inverse over time and creates a pattern.
What causes the U.S. dollar to increase in value and strengthen?
The government plays a significant role in the strength of the dollar as foreign investors are watching for signs of stability and prosperity. Steady, consistent policies, a stable geopolitical outlook, and tax cuts for consumers are all positive developments for the dollar. While terrorist attacks, wars, increased government spending, and unpopular presidents are all bad news for the country and the dollar.
Other sources that could cause or help the dollar to strengthen are:
Trade Balance – if we export more than we import and eliminate and/or dramatically reduce our trade deficit.
Non-farm payroll – how strong our is economy for moving to full employment as an indicator of economic strength in a given economy.
Gross Domestic Production – how strong is the GDP and is it moving up and faster than economic erosion like inflationary factors?
Retail Sales – measures how consumers feel about spending money which rotates the dollar back into the economy and thus shows strength and growth for the future.
Industrial Production – a given country or market continuing to make goods, able to sell those goods and able to produce products based upon a rising demand at home or abroad.
Economics 101: Buy low and sell high!
Today, investors need to focus on early warning signs of when the rotation of the inversion between the dollar and crude oil prices will occur. When trying to evaluate crude oil and its price rebound, watch for the dollar’s weakness or reversal. Shortly thereafter, or simultaneously, the price of crude oil will be moving upwards while the dollar declines. In the current market, we are 18-24 months before that reversal will begin.
As the old saying goes “what goes up, must come down and what comes down will go back up”! When markets rise (and they will) investors may be too late if they are not planning and making a definite decision to get in before it takes off. You never know how high a market may go.
So, when markets are down, it is a prime time for investors to take advantage of price downturns to reap the generous awards when the price rebounds.
Eckard Enterprises is a buyer in this low market and believe investors must think long-term of 18-36 months for the greatest accumulation of assets at one of the best buying opportunities seen in over two decades. The dollar is our guide, and when the dollar starts to go down, we know that oil is going to go back up!