Oil drops below $50 a barrel

I used to dabble in the stock market. Specifically, the Standard & Poors 500 options. I learned a lot how the market works. I made some really great trades and made quite a bit on them. On the other hand, I also made a lot of losing trades and the losses balanced out my wins. It didn’t take long to see that I wasn’t going to be a millionaire.

During my trading time, I always watched futures market. Futures are a good indicator of the immediate market. That helped me prevent some really big losses. I just couldn’t make consistent wins. So I stopped playing with options.

I still watch oil futures. Today, the future price of oil dropped
below $50 a barrel. Here’s an excerpt from Breitbart.

Oil prices slump under 50 dollars per barrel

Nov 20 02:05 PM US/Eastern

Oil prices tumbled under 50 dollars on Thursday, as plunging equities and weak US data sparked fresh concern that a worldwide recession could ravage energy demand, traders said.

In New York, light sweet crude for delivery in December dived to 49.75 dollars a barrel — the lowest level since January 18, 2007. The December contract expires at the close.

Brent North Sea crude for January tumbled to 48.20 dollars, levels last seen in May 2005. Brent closed on Wednesday at 51.72 dollars.

Both oil contracts traded below 50 dollars on Thursday for the first time in almost four years, pulled down by fears about the impact of the ongoing chronic global financial crisis, analysts said.

Oil prices have now plunged by about two-thirds since striking record highs above 147 dollars in July as a global economic slowdown slashes worldwide demand for energy.

“The oil market is reacting to yet more negative news on the prospects for the global economy,” said IHS Global Insight oil analyst Simon Wardell.

“With stock markets continuing to fall around the world, and particularly in Asia, there is just no positive news out there which could help restore confidence in oil markets.”

With the falling economy, the demand for gasoline and other oil products has dropped. In addition, the hurricane season didn’t curb the operation of the Gulf shore refineries. It was a classical Supply & Demand response. The supply was maintained while the demand dropped due to the high prices that started last Sprint through August.

If it hadn’t been for the failure of Fannie May and Freddie Mac, Country Side and AIG, the high prices for oil may have been sustained. But that didn’t happen. Banks fell, stock plummeted and the US and World exchanges took a plunge that hasn’t yet stopped.

But why has the drop of the price of oil continued? OPEC has been cutting back on production. Chavez and the Saudis are losing money as their only source of income is dropping.

One surprising answer is the exchange rate. Before the bottom fell out of the market, OPEC and the EU was attacking the US Dollar. Iran announced that it would no longer accept Dollars as payment for their oil, accepting instead the Euro in payment. With the exchange rate in favor of the Euro, the cost of oil in Dollars also grew and contributed to the high cost of gasoline at the pump. This meant that the price of oil INCREASED as the exchange rate of the Dollar against the Euro dropped!

The information below taken from X-Rates.com, a website that tracks currency exchange rates, supports why the price of oil has dropped as fast as it has and why it continues.

In May 2008 through early August 2008, the exchange rate of the Dollar against the Euro was approximately 0.64. In other words, the Dollar was 2/3rd the value of a single Euro.

However, if you follow the chart, starting with the market crunch in August and following through today, the exchange rate of the Dollar has improved against the Euro. Now, the rate in near 0.80 or a Dollar is now 4/5ths of that of a single Euro. It now costs fewer Dollars for a Euro that it did in early August. It also means that it now costs were Dollars when exchanged for the Euro to pay for that barrel of oil.

The currency exchange is driven, like the stock and commodities market, by futures. With the crunch of the world markets, currency investors felt that the US Dollar was more secure, most stable that other world currencies and began to buy Dollars, as more Dollars were bought, the exchange rate improved, and the price of imports—including oil has dropped due in part to the renewed strength of the Dollar.

The question before us now, is, in the light of the Obama Presidency, the plans for increased taxes and more governmental control and restrictions of the free market, can the currency rates, whether the economy be improved along with the Dollar. It may be that the worse is still to come.