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Why Oil Prices Are Strong 13/07/2012

Published Friday, July 13th, 2012

Recent conventional wisdom has it that oil prices show a close correlation with the euro exchange rate (ie. if the euro weakens, oil prices fall) and with the major stock markets. It is more or less true for this year: there was 88% correlation between Brent and the euro/dollar exchange rate and 93.9% correlation in May. The European benchmark has been following the Dow Jones Industrial Average Index in 68% this year and showed a correlation of 91.82% in May. However, crude oil prices became somewhat detached in June and July with these percentage figures falling to -1.52% in June and -16.90% in July against the euro and -37.52% in June and -9.52% in July against the DJIA. As a matter of fact, front-month Brent has gained 2.8% this month (as of last night’s close), whilst the euro has lost 3.6% and the DJIA 2.4% during the same period.

 

It tells us that over the last few weeks bullish developments in the oil market have taken over from financial considerations as the main driver. The euro zone debt crisis shows no sign of easing, Chinese GDP disappoints, and unemployment both in Europe and in the US is not improving. On the other hand, recent Norwegian oil workers’ strike, record low August North Sea BFOE loading programme, production issues at the Buzzard oil field and the start of the Iranian sanctions as of July1 have been supporting Brent prices. However, it is probably fair to say that these factors will be much shorter-lived than the Eurozone credit crisis, which will mean that oil prices will converge towards falling share prices and towards the falling euro. The first indication of that will be an improving correlation between oil and share prices/euro exchange rate.

Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.