Good News Hiding In A Scary Oil Chart

October 20, 2014

Oil prices are in a slump, but that doesn’t mean it’s all bad for you.

There’s been a “perfect storm” in the crude oil market, and prices have plummeted in recent weeks amid a supply glut that’s faced with slumping demand. To Matt Smith, global commodity analyst at Schneider Electric, the trajectory in oil prices has certainly been a surprising turn of events. But he tells ETF.com that there’s good news behind cheaper oil: It’s neither a sign of trouble for the U.S. economy nor is it bad for U.S. consumers; quite the contrary, in fact. Smith, who also authors the blog Energy Burrito, points out that the dollar is playing a central role in this tale.

Consider the chart below: the performance of the futures-based United States Oil Fund ETF (USO | A-70) versus the iShares Dow Jones U.S. Index Fund (IYY | A-100) and the SPDR S&P 500 (SPY | A-97) in the past three years.

USO_IYY_SPY_3_Yr_Perf

Chart courtesy of Stockcharts.com

ETF.com: Are you surprised by the sharp drop in oil prices?

Matt Smith: Yes. It’s been a perfect storm. We got to highs of $115 a barrel on geopolitical tension, but since those levels, it’s been a perfect combination of factors to bring oil prices sharply lower.

For starters, Libyan flows are returning to the market. They had been absent for about a year—down to 200,000 barrels a day from 1.3 million to 1.4 million barrels a day before—but now Libya is back. We’re also seeing strong U.S. production, and Russian production increasing, while there’s been slowing demand growth. The latest projections cut demand growth to 0.7 million barrels a day, from 1.4 million in earlier estimates. That’s significant.

A really strong dollar has also provided head winds. Historically, there’s an inverse correlation between oil and the dollar, and we’re seeing that play out in oil prices.

 

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