Oil Prices Plummet as Dollar Rallies, Investors Dump Risky Assets

Crude oil prices have been climbing steadily over the last few months on expectations of an economic recovery driving up demand. However, a strong recovery in the dollar and concerns about the pace of economic recovery have caused oil prices to plummet. Investors are increasingly turning to the dollar as a safe-haven asset, leading to a decline in oil prices. The dollar's status as the world reserve currency was reaffirmed by finance ministers with the Group of Eight, and the European Central Bank warned of ongoing risks to financial stability.

Key Takeaways:

• Crude oil prices settled $1.42 lower at $70.62 a barrel on the New York Mercantile Exchange, and Brent crude settled $1.48 lower at $69.44 a barrel on the ICE futures exchange.
• Investors moved out of riskier assets, including oil, and into the dollar amid growing concerns about the pace of economic recovery.
• The manufacturing report from the Federal Reserve Bank of New York showed the state's manufacturing sector is shrinking faster than expected.
• Tim Evans, energy analyst at Citi Futures Perspective, stated that "we've been counting on these other markets for support" and that the market needs to reevaluate if it's a smart trade to assume the dollar is going to be weak.
• Stephen Davis, associate portfolio manager for the Alpine Mutual Funds, stated that a correction could take oil prices as low as $60 a barrel but would likely be a small blip in the move higher.
• Market participants are keeping an eye on developments in Iran, where opposition to President Mahmoud Ahmadinejad's re-election has led to protests and potential instability.

Statistics:

• Oil prices have doubled since February despite weak demand and ample inventories.
• The dollar is expected to continue as the world reserve currency.
• U.S. oil inventory data for the week ended June 12 is expected to show a fall of 1.5 million barrels, while gasoline inventories are expected to rise by 800,000 barrels and distillate stocks are seen increasing by 1.1 million barrels.

Sources:

• Dow Jones Commodities News via Comtex, June 15, 2009
• Citi Futures Perspective
• Alpine Mutual Funds
• Eurasia Group
• Dow Jones Newswires
• Federal Reserve Bank of New York
• European Central Bank