On November 17th, one week before Thanksgiving, the heating oil market took a sharp dive. It was only down five cents per gallon, but that was a definite reversal of the upward trend we had been experiencing for the previous 45 days. Over the next week, the market tumbled a total of 24 cents, bringing lower retail prices with it.
But look again at that chart. It’s a six month chart, and it shows that oil has gone (and let’s count…) Up, Down, Up, Down, Up, Down, Up, and finally Down again. Wasn’t that fun?
Why has the price fallen so fast? There are four domino’s to this one.
The first domino to every financial question these days is “Europe,” and our market is no different. The economies of Greece, Spain, Portugal, and Italy don’t raise enough in taxes to cover their public expenditures, and their taxpayers aren’t willing to pay more because it would hurt too much. This is wreaking havoc on all the markets.
The second domino, and what tipped the scales two weeks ago, was Italy’s failure to pass a viable plan to live within its means. This not only looks bad for Italy, but for all of Europe because Italy is such a big economy. Will the “Euro” survive as a unit of currency if Italy defaults on its debts?
The third domino then, is profound doubts about the Euro’s stability. Investors are not just frightened by the Euro, they’re terrified. And they rushed to move their money to bonds backed by the US Dollar.
The fourth domino, as you will remember from previous posts to this blog, involves the inverse relationship between the Dollar and the price of Oil: When the Dollar goes up, Oil goes down. In the past I have argued that the dollar was getting weaker because of our own government’s inability to live within their means. This hasn’t changed. It’s just that the dollar is the lesser of two evils!
OK, so what will oil do next? (Greek Chorus: Will he try to weasel out of this question?)
You bet I will! But here are the forces at work in the broadest dynamic:
- If Europe continues to fall apart financially and politically, the dollar will continue to strengthen, and oil will continue to fall. [If not, oil will rise.]
- If the US economy posts a strong December holiday shopping season, it will be seen as a harbinger of future US economic growth, which will cause oil to rise (more demand). [If not, oil will fall.]
And the dynamic gets even stranger when we combine these factors. A failing Europe would make America look good, but a double-dip recession at the same time could severely tarnish that image. In that case, investors would invest in commodities, and oil would spike up!
Alas, there’s no way to guess the market. The wisest path is to look to the efficiency of your home, put a Price Cap on your oil or propane, and know that you’ve protected yourself as much as possible.
At the end of the day we can always come up with a good explanation for what just happened in the rear view mirror, and we can never predict what will happen tomorrow. But we sure have fun trying!
The market was up a little more than four cents today, but analysts think it was just “catching its breath,” and it will probably keep going down for at least a couple more days (see chart of the December Heating Oil Futures Contract):
0 Responses to “The Thanksgiving Price Tumble or The Brilliant Clarity of the Rearview Mirror”