by evilgenius » Sun 21 Oct 2018, 12:48:57
I think Onlooker is asking what the current equilibrium is, not whether the concept is valid. My answer would be that with US interest rates rising whatever price will tend to be lower. Since oil is traded in dollars, with the value of the dollar going up the rest of the world won't be able to afford so much oil unless it gets cheaper. The US is producing more oil now, so it taking up the slack and engendering demand isn't as logical as it once was. Mind you, the US will export more oil than ever as well. That whole business of being self reliant is such bs.
Unless the Fed changes policy the range will probably head down. Now, I'm discounting the ability of foreign economies to make changes in response, of course. They can do a lot of things, like reduce fuel taxes or provide subsidies in order to make oil cheaper for their own people or businesses. But those would be more radical responses. I wouldn't expect to see those unless the stock markets actually tank, not simply go into correction. Because that's the other thing, the prices of things are almost all due to what happens in markets for them.
The amount of money available to those markets is determined in large part by interest rate policy. One could say that rates, especially as they rise, are the only storage place where there is really any value. They do compete with things like gold for that distinction. But gold is indestructible and rates are transitory instruments. When rates are moving up there is less money available to many markets because of what traders have to do in consideration of that stored value, where else they should put their money. That might be cash, the stock of companies that will benefit from a downturn, utility or other interest paying stocks or privately owned cash cows. Most investment instruments usually suffer under a rate rising regimen, especially commodities. Growth stocks suffer the most because they need cheap rates in order to drive their business models. Cheap rates incubate. Gold even suffers, though that's perhaps in the long term. Gold can see a lot of upside if there is too much turbulence in more ordinary investments and investors run to it out of fear. Bond prices would be falling, so they wouldn't be a very attractive investment to run to in comparison, except in the very short term, as in huge stock market sell offs.
My guess is that when oil hits $50, or the DOW $20,000, the Fed will stop raising rates.