High price of oil saving the US Dollar?
We often hear about how the US dollar is pegged to oil as the demand for the currency is derived mostly from oil which can only be priced in US dollars. As the price for oil rises, it will take more dollars to buy the same amount of oil, thus push up the price of the US Dollar. With oil at $135 per barrel, it now takes $11,475,000,000 per day in dollars to supply the world, that’s twice as much as just a couple years ago when the word worked with $60 barrels.
When looking at it, $11 Billion isn’t much when considered by how much is actually trading on the forex market every day, usually about $1.5 to $2 Trillion each and everyday. But the fact is that accounting principles and money supply does not need statistical backing. If I were to receive a payment for something I knew that could only be used to trade for something else, something as important as oil and gasoline, I would surely set back more than just one day’s supply of $11 Billion. I go to set weeks, even years of money that I would presumably use for oil. This is what China and Japan is doing, and it’s what hundreds of even smaller countries do to keep their oil flowing. We like to be able to buy what we want, countries, governments and even corporations like to do this as well.
One good thing about a higher price of oil is continuing demand for the US dollar. While we still should be worried that Iran’s drop of the US dollar for oil purchases lessens demand for the dollar, the remaining majority of oil is sold in US dollars and creates demand.
The price of oil is still too high, I think much past $110 is pure speculation at this point. When the market does correct we’re looking back to the low $100s for a long term cup and handle chart pattern. No more sizeable investments in oil before a correction, look for value not a get rich quick scheme.
