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The Biggest Threat To Oil Prices Is The Dollar, Not A Supply Glut

Oil Sands

The glut of gasoline and other refined products has taken center stage for the oil markets, threatening to initiate a new bear market and push oil prices down below $40 per barrel for the first time in months. But while a surplus of refined products is weighing on crude prices, there could be another culprit that does not get as much publicity.

Goldman Sachs says that a strong dollar deserves more blame for an oil price downturn, and further strengthening of the greenback looms as a much larger threat to prices than the gasoline glut. The U.S. Federal Reserve could raise interest rates and the effect of that, combined with lingering global financial uncertainty, could push oil prices below $40 per barrel. Goldman says that while there is indeed a glut of gasoline, it won’t be responsible for further declines in oil prices because it is a supply-side and not a demand-side problem.

“We are currently going through the typical later stages of an oil bear market, when strengthening crude fundamentals run into weakening product fundamentals,” Goldman wrote in a July 27 report. “Uncertainties on the near-term path of the oil market re-balancing have left the U.S. dollar as the primary driver to lower crude oil prices recently.” In other words, the fluctuation of the dollar could have a larger impact on oil prices than the fundamentals of oil supply and demand.

There are several other factors that could push oil back down to $35 per barrel or lower. They include a return of production from Libya or Nigeria (unlikely, but not impossible), a global slowdown in demand, or China’s move to slow its stockpiling of crude for its strategic petroleum reserve.

Any of those possible scenarios would erase the 230,000 barrel-per-day deficit that the investment bank is predicting for the second half of the year.

The dollar may loom over oil prices, but it fell by the most in nearly two months on Thursday after the Fed hinted that it would stay cautious. The greenback fell 0.5 percent against an array of currencies after the Fed wrapped up its Wednesday meeting without signs of an imminent rate increase.

By Charles Kennedy of Oilprice.com

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Leave a comment
  • Kr55 on July 28 2016 said:
    Would never have expected GS to be a voice of reason about the current panic. They are right, this is an inevitable step of the oil bear cycle. But, that doesn't stop people from trying to sell it like it's never happened before and the world is ending. Always money to be made from an overshoot in any direction, and always people out there willing to be manipulated.
  • John Scior on July 29 2016 said:
    someone at Goldman Sachs must be readingmy comments, either that or great minds think alike. See story :

    http://oilprice.com/Energy/Oil-Prices/Oil-Hits-50-But-Can-It-Maintain-Its-Gains.html
  • Chaz on August 02 2016 said:
    It would be the dollar -- IF the markets were not so nervous about every single bit of production.

    They go nuts because we have added 44 rigs and the Iraquis added 25,000 Barrels per day. That's Armageddon to them.

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