Oil Rally Continues Despite Poor Fundamentals

1045 WordsMay 26, 20165 Pages
Oil Rally Continues Despite Poor Fundamentals Oil Rally Continues Despite Poor Fundamentals Despite some contradictory signs, oil prices have been gaining steadily based on reports that U.S. oil inventories have dropped and concerns about production disruptions in both China and Nigeria. A report from cnbc.com speculates that economic weaknesses and contradictory signals about the dollar 's strength won’t significantly impact the trend of rising oil prices. Often linked to inflation and higher interest rates, oil prices have narrow windows for growth where they can exert positive influences on economic conditions but a wider range where economic instabilities occur. This is especially true in the current market where long-term prospects…show more content…
The report suggest that there a direct correlation between oil prices and the inflation rate that became extraordinarily clear after the 1973 OPEC oil embargo "when the cost of oil rose from a nominal price of $3 before the 1973 oil crisis to around $40 during the 1979 oil crisis." This extraordinary change caused long lines at gas pumps, gas rationing, massive inflation rates and changes in oil policies and auto manufacturing to favor production of smaller cars. The Consumer Price Index is the key yardstick that measures inflation, and it more than doubled in eight years from 41.20 to 86.30 during the time that oil prices were skyrocketing in the 1970s. It had previously taken 24 years for CPI prices to double. Other key economic benchmarks that rising oil prices affect include: Diverting investment resources away from replacing infrastructure and increasing the costs of oil-based materials like asphalt Generating more expenses for all government agencies and jurisdictions, which include paying unemployment benefits and higher utility costs for heating buildings and steeper prices for gas to operate auto and truck fleets Reducing discretionary spending on travel, luxury goods, automobiles and heating and cooling systems Cutting profits for most businesses that use oil-based products Increasing the costs of plastics that are manufactured using oil resins Creating the conditions for a recession or economic depression Causing wage and salary
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