In this last period oil is undoubtedly the great protagonist of the market, because of its great decline and the consequences it has on all sectors, on the economy in general, on international and national policies. It is a real hurricane that is shaking the world and shuffling many cards on the table, opening a debate that many media are not following closely enough and that the heads of state are carrying out keeping a low profile. As there are consequences for different financial sectors, inevitably different financial instruments are also being affected, such as the energy shares of oil companies. Similarly, some emerging exporting countries are facing a wave that can easily flood and slow down their growing economies.
Another important factor to take into account is the relationship that will be created between the collapse in oil prices and the FED, as the Federal Reserve at this positive time for the U.S. economy aims to raise interest rates. In this article we will try to see if oil can influence the plans of the FED.
How Can It Affect The Collapse Of Oil Prices?
In order to do this, it is first necessary to study well the characteristics of this raw material with regard to its relationship with the market and its capacity for influence. We can say, for example, that oil prices are a good economic indicator, since they often have a real influence on the economy and on economic policy choices. Moreover, we can certainly say that the substantial falls in oil prices also imply a distortion of the international economy, which can also affect the US economy). As far as the international economy is concerned, stocks must be brought into play, because as we said in the introduction, the collapse in the price of oil also affects other financial instruments, in addition to those of the raw material and oil futures. As far as stocks are concerned, energy companies in particular are at risk, and especially those that base their production on the extraction of oil.
The price of oil in recent years has seen peaks, such as in 2008 and 2011, but for very different reasons. It is interesting to see not only how the price of crude oil can influence the economy, but also how the economy and finance in turn influence the price of oil. The precedents of 2008, when high prices helped to create the recession, thus becoming an indicator of the opposite direction, and of 2011, when high prices were created by speculation on inflation, thus creating a false signal on the economy, should therefore be highlighted. This time, however, the price of oil fell because of overproduction in the market, especially because of the USA, which increased its production exponentially at a time when demand was weak. It is therefore a matter of applying the simplest of principles: if there is a decrease in demand and an increase in supply, the market price falls.
What the FED Will do
What will the FED do in this context? Unofficial rumors say that the FED would be ready to do another round of Quantitative Easing, also taking advantage of the fact that the European Union is about to move in the same way. Other official voices instead announce for the increase in interest rates. In this regard, however, we must summarize the opinion of many economists who see in the current U.S. recovery a lot of weakness, especially with regard to some points. The increase in employment, for example, should be assessed from the point of view that these new jobs belong above all to sectors with very low wages, such as the large-scale retail trade, which is not particularly linked to the major industrial giants that symbolise the strength of the American economy.
In this context, the price of oil intervenes, even if late, since its collapse is “finally” marking the implications on the stock market. Now, it should be borne in mind that the USA is the home of capitalism and that capitalism is mainly based on the concept of equity, that is, the shareholding of companies, of companies. The FED, taking the place of the American economy and therefore of its capitalism, cannot but take into account the effect of the price of oil on the American shares, and the decreases that these may suffer (and are beginning to suffer) because of the oil.
In fact, as already specified in this article, only extraction companies, energy production companies with oil as their main business, but also companies with large holdings in oil, are affected. For the rest of the shares there can be no other benefit than a benefit resulting from the lowering of the price of oil and therefore a decrease in the cost of production.
The fact that the FED is still in favor of raising interest rates means that it is putting the balance of payments needle in favor of not worrying about any implications of the price of crude oil for American companies.
The main currency pair could see a further turn in favor of the dollar if the FED raises rates and the EU adopts the Quantitative Easing that has been talked about for months and is being tightened these days. In this case, we will certainly see the euro fall below $1.20 but probably fall around $1.15. These figures seem absurd at the moment, especially if you think that on average we danced around 1.35/1.40.
At the moment we can say that you can create a pair of portfolio not bad, formed by oil and eur/usd, in which to bet massively on the dollar and more gently against oil, which may fall again but not by much. As for the eur/usd, focus on the medium term, while for oil on the short term. In fact, crude oil prices could rise soon (albeit slightly) and therefore it would be good to focus on oil especially in daytrading as long as the downward trend continues, in which to also recognize the speculative factor, in addition to that related to the relationship between supply and demand in the actual market.