It would appear that the jury is out right now on whether or not the gradual but intentional weakening of the American dollar will continue or reverse oil prices and also the resulting stock value of oil corporations. Traditionally, a devalued dollar has driven oil costs and commodities higher with stock appreciation rising in a comparable manner. Unfortunately, with so several current variables at play, seeing a clear forecast is tricky, if at all feasible.
From 2001 to 2008, when the dollar fell to its lowest, the 73 range, oil-exporting companies profited by demanding higher prices per barrel so that they could afford their operating expenses in other currencies. Globally, investors began to take protective measures by moving some of their portfolio into commodity futures, which created a temporary jump in value there. During that time, not just oil companies, but banks and energy companies also profited from the weakened dollar. ExxonMobil stock soared from $36 – $85, a 138% appreciation and similar to the percentage increase of crude oil per barrel. Are we set for a repeat? Maybe, or maybe not.
Definitely, the lack of commitment from the G-20 conference recently all but gave permission for the Federal Reserve to exercise quantitative easing. With no effective measures to require accountability, plans are moving ahead to start round 2 of asset purchasing as early as the beginning of November in another effort to push interest rates down again and jump start the sluggish economy. Until that happens, the surprising, small but encouraging, increase in existing home sales in September may have blunted the effects of the disappointing G-20 conclave.
If, in fact, the dollar is allowed to slide further than the 10% it has against the euro in the last 3 months or to the 15 year low against the Japanese yen, it is expected that not only oil prices and commodities, including gold, will rise but so will stock in participating oil companies. Stock brokers and online traders will be watching these opportunities closely for a chance to gain some possible turn-over advantage or as a portfolio hedge against other investments.
If an all-out currency war can be eliminated, those companies with significant foreign product lines stand to make excellent cash and represent profitable stock market investment prospective. A cheaper American dollar means other currencies can purchase additional and sales will boost. In countries not pegged to dollar currency, oil will remain somewhat cheap. In America, due to the fact we are limited to the American dollar as our only currency, high oil costs may well trigger other responses like less foreign travel, more demand for gasoline at property, and extra healthy competition between foreign imports and domestic products.
For the stock market, dollar devaluation may be a win-win situation for oil companies, at least in the short term. Increased sales at higher prices sounds a lot like the definition of profitability. As a weakened dollar creates more buying potential, countries such as Germany and France will be able to purchase more oil at cheaper rates, energizing the age-old supply and demand model. Conversely, a stronger, healthier American dollar would make crude oil more expensive for other weaker currencies, decreasing the demand for oil and forcing lowered prices.
Selecting to invest in foreign commodities and oil organizations based solely on the perceived strength or weakness of the dollar alone may perhaps be risky. Nevertheless, for those willing to place themselves in position prior to the Fed moves in November, this could be an exciting and potentially profitable opportunity. Fagio D. Rather
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