2 Main Factors Fueling the Rise in Oil Prices

The market price of oil has been on a serious tear lately, as it has managed to climb higher and higher over the past three weeks. From the looks of it, it could be headed for more gains in the near future.

Last Friday, oil prices registered another big leap as U.S. oil came very close to tapping $106 per barrel. Meanwhile, contracts for Brent crude oil for the month of August rose by over $1 and settled just below the $109 mark.

But what does this commodity have to do with us forex traders?

Well, for one, oil prices affect consumer spending, especially in times like this, when the U.S. summer driving season is in full swing. When oil prices rise, consumers tend to think twice about traveling out of town, which sometimes puts a dent on spending.

Aside from that, we track oil prices because of its positive correlation with the Canadian dollar. Oil happens to be one of Canada‘s top exports, so where oil prices go, the Canadian dollar usually follows. That being said, further increases in the price of the commodity could provide support for the Loonie.

1. Projected increase in demand

As we learned from Economics 101, the Law of Supply and Demand states that higher demand for an item usually translates to an increase in price. The International Energy Agency estimates that demand for oil will rise by 1.2 million barrels a day next year, which is an upward revision from its former forecasts of 930,000 barrels a day.

Truth be told, we’re already seeing signs of a strong pickup in demand. The past four weeks have seen a 2.5% increase from the same period last year.

2. Decline in supply

The other half of the Law of Supply and Demand says that a decrease in supply is typically followed by an increase in price levels.

Just last week, the U.S. Energy Department reported that crude oil stockpiles fell by a whopping 9.87 million barrels. The main reason for the decline was the string of refinery outages from plants in the U.S. Gulf Coast, East Coast, Midwest, and Canada.

The Energy Department warned that further declines in oil supply could be in the cards, as Iraq halted its oil exports on its pipeline to Turkey because of a geographical fault. Even though repair teams are working hard to fix the damage, each day of the standstill translates to a loss of 1.65 million barrels!

It doesn’t help that the ongoing political turmoil in Egypt is putting a constraint on oil production in the Middle East. As we’ve witnessed in the past, conflicts like these tend to spread to surrounding nations, posing an even larger threat to oil production in the entire region.

Market watchers can’t help but worry that the combination of high demand and low supply would continue to put upward pressure on oil prices, possibly pushing U.S. gasoline prices to over $4 per gallon.

Aside from discouraging average Joes from guzzling up, rising fuel costs could also eat up a huge chunk of manufacturing companies’ profitability. As a result, consumer spending and business investment could slow down, forcing overall economic growth to hit the brakes.

Do you think rising oil prices would weigh on growth? Let us know by voting through the poll below!