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Page added on November 28, 2014
Oil and Currency Markets Reflect Expectations for Lower Global Economic Growth
Since August, both crude oil and currency markets have been influenced by lower economic growth expectations in countries outside the United States. Prices in both markets recently broke out of established trading ranges, driven by concerns about weaker future global demand. The current situation, with the dollar index and oil prices moving in opposite directions, presents a sharp contrast to one in which crude oil supply disruptions or geopolitical risks would cause both the dollar index and crude prices to rise.
Although the U.S. economy showed robust growth in the third quarter of 2014, recording an estimated 3.5% growth rate, economic data from Europe and China have led to expectations of potentially weaker demand for crude oil. Eurozone gross domestic product (GDP) growth was 0.2% in the third quarter, and inflation was low at 0.3% and 0.4% in September and October, respectively. In China, third-quarter GDP growth was 7.3%, the lowest annual growth rate since first-quarter 2009.
The divergence of growth expectations between the United States and the rest of the world is also reflected in currency markets. As economic growth slows in countries other than the United States, it increases the likelihood that their central banks will implement further steps to stimulate growth, like the recent announcement of rate cuts and quantitative easing by the European Central Bank and the Bank of Japan. In the United States, stronger economic growth led the Federal Reserve to end its quantitative easing program and raises the possibility of increases in interest rates next year. These opposing shifts in monetary policy had the combined effect of increasing the value of the U.S. dollar against other world currencies (as measured by the U.S. dollar index) by 8.1% from August 1 to November 17.
6 Comments on "Oil and Currency Markets Reflect Expectations for Lower Global Economic Growth"
paulo1 on Fri, 28th Nov 2014 9:09 am
re: Although the U.S. economy showed robust growth in the third quarter of 2014, recording an estimated 3.5% growth rate,
hmmmm. I don’t think so.
Davy on Fri, 28th Nov 2014 9:46 am
Paulo, they are talking the 1%er tier 1. The 99%er tier 2 is -3.5%. I think that adds up to zero. Marm, will you please check my addition. That seems to be your specialty.
rockman on Fri, 28th Nov 2014 9:52 am
Paulo – “Since August, both crude oil and currency markets have been influenced by lower economic growth expectations in countries outside the United States. Prices in both markets recently broke out of established trading ranges, driven by concerns about weaker future global demand.”
Amazing isn’t it: for several months the data has been showing weaker oil demand which obviously would lead to downward pressure on prices. And wouldn’t you expect the folks who make a living selling into consumer demand like the oil refining companies be just as aware, if not more so, of this trend? And anticipating lower prices for their refined products wouldn’t they be unwilling to pay a high price for oil? Thus the only way for the exporters to maintain cash flow would be to lower their prices lest they lose market share.
That’s why all I could do was smile at all the chatter thrown out about the KSA/OPEC crashing oil prices to hurt the US shale players. Truly comical: based upon a decrease of only $20/bbl OPEC collective will lose $960 BILLION over just the next 12 months. And this they would do to hurt Chesapeake and EOG? LOL.
But let’s face it: conspiracy theories are much more entertaining than Econ 101.
Solarity on Fri, 28th Nov 2014 10:50 am
Viewing the US economy in terms of true production (not delineated in $), there is one critical area where production has grown: OIL. Almost all other sectors (farming, mining, construction, manufacturing, etc.) are either treading water or declining. With price of Oil dropping, its dollar influence on the overall economy will also fall. A critical point will occur when preliminary first quarter stats are reviewed in May 2015.
GregT on Fri, 28th Nov 2014 11:32 am
“In the United States, stronger economic growth led the Federal Reserve to end its quantitative easing program and raises the possibility of increases in interest rates next year.”
BS. The Fed has no choice but to end QE. Without this latest drop in oil prices, ending QE would have crushed what is left of the US economy. With interest rates at historical lows, the FED no longer has the means to fight deflation. Interest rates must go up, and the only way this can happen is to kickstart the economy. 6 years of economic ‘stimulus’ has not worked. Energy is what fuels the economy, cheap energy is what allows the economy to grow. This is nothing more than a last ditched attempt at maintaining USD global hegemony. This also, will not work.
“These opposing shifts in monetary policy had the combined effect of increasing the value of the U.S. dollar against other world currencies”
All currencies are losing value. In the land of the blind, the one eyed man is king.
Makati1 on Fri, 28th Nov 2014 6:45 pm
We are nearing the end, folks. There is not one statistic on the internet that I would bet my life on, but we seem to believe them enough to comment and make predictions. Even if you are in the business, you still have to take the numbers with a grain of salt. One place says China’s oil imports are down and another says they are putting record amounts into storage, and another says that there are more oil tankers headed for China than in the last 10 years, and on and on.
The truth is: NO-one knows the numbers with any accuracy. it is impossible in today’s world. Some of the oil is reshipped to another country. China is supposedly storing oil for Iran and then reshipping it to South Korea. Who knows that for a fact except China, Iran and South Korea?
All you can do is watch the results as it affects YOUR life and YOUR future. We can all guess, but none of us can make a statement we would bet our lives on … or would we? I think we are all betting our lives on our perceptions of reality as stated here in this forum.